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PUBLIC    DEBTS 


AN  ESSAY  IN  THE  SCIENCE 
OF  FINANCE 


BY 


HENRY  C.   ADAMS,  Ph.D. 

OF   THE   CNITEKSITY  OF  MICHIGAN,   AND   COENELL   CNITERSITT 


KEW     YORK 

D.    APPLETON    AND    COMPANY 
1890 

libido 


Copyright,  1887, 
By  D.  APPLETON  AND  COMPANY. 


TO 

MR.    FRANCIS    WHITE, 

OF   BALTIMOEE, 

WITH  THE   8IN0EEE   BEGAEDS   OF 

THE    AITTHOE. 


PEEFAOE. 


It  is  tlie  purpose  of  this  treatise  upon  Public  Debts  to 
portray  the  principles  wliich  underlie  the  use  of  public 
credit.  The  essay  is  neither  statistical  nor  historical,  al- 
though it  relies  upon  statistics  and  makes  frequent  appeals 
to  history.  In  one  respect  it  differs  from  works  upon  the 
same  subject  by  Gennan  or  French  writers,  for  it  recog- 
nizes a  distinction  between  National  Deficit  Financiering 
and  Local  Deficit  Financiering,  and  lays  down  rules  for  the 
latter  not  in  complete  harmony  with  rules  applicable  to  the 
former.  This  peculiarity  in  structure  was  imposed  upon 
the  essay  by  the  fact  that,  being  addressed  to  Americans, 
it  was  obliged  to  conform  to  the  characteristic  features  of 
American  public  law. 

The  author  desires  to  make  public  recognition  of  the 
assistance  rendered  to  him  by  the  late  Mr.  Raphael  A. 
Bayley,  of  the  Department  of  Warrants  in  the  United 
States  Treasury,  in  placing  at  his  disposal  certain  manu- 
scripts upon  questions  pertaining  to  public  indebtedness. 
He  also  desires  to  acknowledge  the  influence  of  M.  Leroy- 
Beaulieu's  masterly  work  upon  the  Science  of  Finance  in 
giving  shape  to  some  of  the  arguments  found  in  the  fol- 
lowing pages. 

Ann  Arbor,  Mich.,  January,  1S87. 


C0l!^TE]5rTS. 


PART  I. 

Public  Boeeowing  as  a  Fustakcial  Policy. 

Chaptee  I. — Modern  Public  Debts. 

PAaE 

Growth  of  public  debts 3 

Public  debts  imply  an  established  money  market 7 

Public  debts  imply  commercial  democracy 8 

Increase  in  modern  public  expenditure 12 

Influence  of  nationalism  on  expenditure    .......  14 

Influence  of  socialism  on  expenditure         .        .        .        .        .        .        .  1*7 

Chaptee  II. — Political  Tendencies  of  Public  Debts. 

Public  debts  oppose  popular  government 22 

Foreign  debts  endanger  the  autonomy  of  weak  states         .        .        .        .25 

Story  of  the  Egyptian  finances 29 

Anomalous  character  of  a  State  bond 36 

Chapter  III. — Social  Tendencies  of  Public  Debts. 

Public  debts  tend  to  perpetuate  class  distinctions 39 

Distribution  of  the  French  debt          ........  43 

Distribution  of  United  States  bonds 44 

The  international  social  question 50 


Chaptee  IV. — Industrial  Effects  of  Public  Borrowing. 

This  question  fundamental  to  good  financiering 
French  industries  and  "  the  five  milliards  " 
Advantages  of  foreign  loans  at  the  outbreak  of  a  war 
Industrial  effect  of  loans  placed  at  normal  rates 
Industrial  effect  of  loans  placed  at  high  rates    . 
Industrial  effect  of  loans  placed  at  rates  abnormally  high 
Summary  of  the  chapter 


62 
64 
58 
62 
66 

n\ 

76 


vm 


CONTEXTS. 


Ohaptee  V. —  When  may  States  Borrow  Money  ? 


Limit  of  the  financier's  responsibility 

Loans  may  be  used  to  cover  temporary  deficits 

Dangers  of  surplus  financiering 
Loans  may  be  used  to  meet  fiscal  emergencies 

New  taxes  are  not  quickly  remunerative . 

The  Prussian  policy  of  a  "  war-chest  "  not  commendable 

The  English  use  of  the  income-tax  not  commendable 
Loans  may  be  used  for  public  works  .... 

Summary  of  the  chapter 


FAGB 

.  77 
,  78 
.  80 
.  83 
.  84 
.  85 
.  93 
.  95 
.  99 


PART  11. 

National  Deficit  Financieeing. 

Chapter  I. — Financial  Management  of  a  War. 

Three  policies  open  to  the  financier    ........  105 

War  expenditure  may  be  met  by  taxation 106 

Excessive  taxes  endanger  all  revenue 108 

War  expenditure  may  be  met  by  loans 110 

Financial  management  of  the  war  of  1812 112 

Financial  management  of  the  war  of  1861 126 

True  policy  for  the  financial  management  of  a  war 134 

Diagrammatic  presentation  of  this  policy 141 

Conclusion  of  the  argument    .........  142 

Ohaptee  II. — Classification  of  Public  Debts. 

Two  principles  of  classification 143 

Fundamental  character  of  public  debts 143 

Legal-tender  notes  are  forced  loans 144 

Technical  questions  pertaining  to  the  creation  of  a  debt     ....  147 

Uniformity  or  variety  in  debt-paper  ? 149 

Annuities  or  bonds  ? 150 

Time  for  which  debts  should  be  drawn 153 

Par  or  discount  bonds  ? 167 

Summary  of  the  chapter 177 

Chapter  III. — Liquidation  of  War  Accounts. 

Why  floating  debts  should  be  quickly  funded 179 

Why  specie  payments  should  be  quickly  resumed 182 

Relation  of  inflation  to  panics 184 


CONTENTS. 


IX 


PAOB 

Workings  of  redundant  currency  on  the  return  of  peace    ....  187 

Various  theories  of  resumption 196 

Sketch  of  resumption  in  the  United  States 198 

Summary  of  the  chapter 202 

Chapter  IV. — Peace  Management  of  a  Public  Debt. 

Three  ends  to  be  attained 203 

Profitable  use  of  public  debts 203 

Use  made  of  bonds  in  ordinary  business 204 

Use  made  of  bonds  by  national  banks     .......  206 

Relation  of  debt-management  to  commercial  panics        ....  206 

Sketch  of  the  panic  of  1873 211 

.  217 
.  218 
.  220 
.  224 
.  226 
.  228 
.  231 
.  233 
.  235 
.  238 


Conversion  of  public  debts 

Opposition  to  conversion  in  France 

First  step  toward  conversion  is  the  establishment  of  credit 
What  guarantee  should  be  given  against  reconversion  ?  . 
Criticisms  upon  the  refunding  act  of  1870 

Discount  conversion 

Changes  in  the  United  States  debt  since  1865 

Comparison  of  the  English  and  American  theory  of  conversion 

Shall  the  administration  employ  syndicates  ?   . 

Summary  of  the  chapter 


Chaptee  V. — Payment  of  Public  Debts. 


Ought  public  debts  to  be  paid  ? 

Classic  arguments  against  payment 

Payment  does  not  retard  industrial  development 
With  what  rapidity  should  debts  be  paid  ? . 

Debt-payment  in  the  United  States  since  1865 
In  what  manner  should  debts  be  paid  ?       .        .        . 

The  old  sinking-fund  theory 

Terminable  annuities  are  disguised  sinking-funds    . 

Why  England  adopts  terminable  annuities 

Policy  of  the  Federalists  on  debt-payment 

Gallatin's  views  on  debt-payment   .... 

Sinking-fund  of  Secretary  Chase     .... 

Relation  of  national  banks  to  the  policy  of  debt-payment 

Diversion  of  the  sinking  fund  appropriation  . 

Summary  of  the  chapter 


240 

241 

243- 

247 

249 

251^ 

251 

255 

257 

261 

266 

269 

274 

280 

282 


CONTENTS. 


PART   III. 

Local  Deficit  Financiering. 

Chaptee  I, —  Comparison  of  Local  with  National  Debts. 

Financial  principles  are  of  limited  application    . 

Legal  character  of  local  debts 

States  can  not  be  forced  to  pay  their  bonds     . 

Municipal  corporations  may  be  forced  to  pay  their  bonds 
Public  duties  of  local  governments 

Purposes  for  which  local  credit  was  employed  previous  to  18G0 

Purposes  for  which  local  credit  has  been  employed  since  1860 
Comparison  of  the  rules  of  local  and  national  deficit  financiering 

The  theory  of  sinking-funds  applicable  to  local  financiering    . 

Policy  of  conversion  of  no  importance  in  local  financiering    . 

Rules  of  debt-payment  peculiar  to  local  financiering 

Summary  of  the  chapter         ....... 


Chaptee  II. — State  Indebtedness  between  1830  and  1850. 
This  period  the  second  of  State  indebtedness     .... 
Change  of  political  sentiment  in  1830  ..... 

Internal  improvements  under  direction  of  the  Federal  government 
Internal  improvements  under  direction  of  the  States 
Sketch  of  internal  improvements  in  Michigan     .... 
Causes  of  enthusiasm  for  internal  improvements 
Assumption  of  local  debts  urged  on  the  Federal  government 

Plan  of  assmnption  proposed     . 

Public  reaction  against  State  management  .... 

Steps  in  the  growth  of  the  industrial  constitution 

Chaptee  III. — Municipal  Indebtedness. 

Growth  of  municipal  debts  in  the  United  States 

Growth  of  municipal  debts  in  Europe        .... 

Municipal  debts  as  mfluenced  by  growth  of  urban  population 

Progressive  increase  m  expenditures       .... 

Progressive  decrease  in  ability  to  pay  taxes     . 

Relation  of  speculation  to  municipal  debts 
Relation  of  inland  commerce  to  municipal  debts 
Relation  of  local  administration  to  municipal  debts     . 

Proposals  to  restrict  suffrage  to  property  owners     . 

The  city  as  "  a  co-operative  organization  of  property  owners  " 

Chapter  IY. — Policy  of  Restricting  Governmental  Duties. 

True  source  of  municipal  corruption  . 

Influence  of  the  commercial  spirit  on  public  officials        . 
Suggestions  for  municipal  reform 


367 
371 
373 


CONTENTS.  ^j 


PAOX 


Restriction  of  governmental  duties     ......  375 

Constitutional  limitations  upon  the  use  of  credit      ...  377 

Discussion  upon  the  policy  disclosed '  385 

Relation  of  this  question  to  the  question  of  "  States  Rights  "  .  ^391 
Suggestions  for  conserving  the  integrity  of  the  States  ....  395 
Summary  of  the  chapter .399 

Index        .        .        ,        . 

401 


PART   I. 


PUBLIC  BORPiOWING  AS  A  FINANCIAL 
POLICY. 


PART    I. 

PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 


CHAPTER  I. 

MODERN  PUBLIC   DEBTS. 

The  civilized  governments  of  the  present  day  are  resting 
■  A under  a  burden  of  indebtedness  computed  at  $27,000,000,000. 
This  sum,  which  does  not  inchide  local  obligations  of  any 
sort,  constitutes  a  mortgage  of  $722  upon  each  square  mile 
of  territory  over  which  the  burdened  governments  extend 
their  jurisdiction,  and  shows  a  per  capita  indebtedness  of 
$23  upon  their  subjects.  The  total  amount  of  national  obli- 
gations is  equal  to  seven  times  the  aggregate  annual  revenue 
of  the  indebted  states.  At  the  liberal  estimate  of  $1.50  per 
day,  the  payment  of  accruing  interest,  computed  at  5  per 
cent,  would  demand  the  continuous  labor  of  three  millions 
of  men.  Should  the  people  of  the  United  States  contract  to 
pay  the  principal  of  the  world's  debt,  their  engagement 
would  call  for  the  appropriation  of  a  sum  equal  to  the  total 
gross  product  of  their  industry  for  three  years ;  or,  if  annual 
profits  alone  were  devoted  to  this  purpose,  they  would  be 
enslaved  by  their  contract  for  the  greater  part  of  a  genera- 
tion. 

But  it  is  not  alone  the  magnitude  of  this  constant  drain 
upon  the  product  of  current  industry  that  invites  our  atten- 
tion to  a  study  of  public  debts ;  their  recent  appearance 
suggests  many  questions  of  equal  importance.     Previous  to 


PUBLIC  BORROWING  AS  A  FINANCIAL  POLICT. 


tliG  present  century,  En<^lund  and  Holland  wore  the  only 
countries  that  had  learned  by  experience  the  w'ei<;ht  of  na- 
tional obligations  ;  but  at  the  present  time  the  phenomenon 
of  public  debts  is  almost  univercal,  and  there  are  many  peo- 
ples that  rival  England  in  the  taxes  paid  for  their  support. 
The  French  debt,  capitaH/ed  at  5  j)er  cent,  is  equal  to  the 
sum  of  $3,900,000,000  ;  the  Italian  debt,  estimated  in  the 
same  manner,  amounts  to  $2,1()0,000,000  ;  while  that  of 
Si)ain  is  $1,250,000,000;  that  of  Austria- Hungary  is|2,000,- 
000,000  ;  that  of  Ilussia  is  $2,420,000,000.  That  this  policy 
of  resorting  to  public  credit  as  a  source  of  revenue  did  not 
become  general  till  after  1818  may  be  seen  from  the  ligures 
presented  in  the  following  table  : 

Table  showing  the  Groxrth  of  PiihUc  Debts  for  Stated  Years, 


A.D.» 

CapltAl  luniB  owed. 

1714 

1798 

$1,500,000,000 

2,50(),00(),()()0 

7,7r)0,o(H),()i)0 
8,('>r)0,0()(),(H)() 

l!i,7f>(>,00(),(l(H) 
2!{,()2r),(H»0,00() 
26,970,000,000 

1820 

1S18 

1802 

1872 

1882 

Chnraotor  of  periods. 


riiiofly  j)Ciico. 
War. 

ri'iico. 

Ariimiiicnt, 

Wiir. 

Aiinaincut  and  nntionnl  iiiiprovcmcnt. 


A  glance  at  this  table  shows  that  modem  governments 
do  not  pay  running  expenses.  The  extension  of  indebted- 
ness, from  1708  to  1820,  was  in  large  part  due  to  the  crea- 
tion of  the  English  debt  during  the  Napt)leonic  wars.  From 
1820  to  1848  there  was  but  a  limited  appeal  to  credit  by  the 
leading  nations  of  the  world,  although  neither  Austria  nor 
France  succeeded  in  fully  meeting  current  ex])enditure  with 
clear  income.  But  about  this  time  a  decided  cluuige  seems  to 
have  made  its  appeai'ance.  Napoleon  III  drew  Franco  into 
a  most  reclcless  system  of  financiering.  Between  1862  and 
1872  there  were  certain  great  \vars  whicli  added  enormous 
sums  to  the  debts  of  the  world.     To  quote  from  Mr.  Naah : 


'  Authority  for  dates  previous  to  1862  is  Mr.  R.  Dudley  Baxter;  for  dates 
18C2  and  Hubpoqucnt,  Mr.  Robert  Lucaa  Nash. 


MODERN  PUBLIC  DEBTS.  5 

The  United  States  Civil  War  cost  the  victors  no  less  than 
£450,000,000,  while  the  Austro-Gerraan  War  added  £60,000,- 
000  ;  the  Paraguayan  War,  £40,000,000  ;  and,  lastly,  the  Franco- 
German  War,  £390,000,000  to  the  sum  total  of  National  bur- 
dens. ^ 

Never  before  has  such  free  use  been  made  of  public 
credit.  The  ten  years  following  1872  witnessed  several  ex- 
pensive conflicts  between  some  of  the  smaller  states,  while 
many  of  the  British  colonies,  as  well  as  some  of  the  Euro- 
pean powers  of  the  first  class,  adopted  a  line  of  domestic 
financiering  that  resulted  in  greatly  extending  the  list  of 
public  bonds.  The  fact  is,  that  since  1848  there  has  been  an 
annual  average  deficit  in  the  public  accounts  of  the  world  of 
over  $530,000,000.  The  constancy  of  this  deficit  shows  a 
confirmed  policy  on  the  part  of  governments.  Such  man- 
agement of  public  treasuries  (whether  mismanagement  or 
not  is  a  question  for  later  discussion)  was  unknown  to  earlier 
financiers.  Both  the  extent  to  which  borrowing  is  carried 
and  the  carelessness  with  which  it  is  regarded  shows  that  a 
new  factor  has  been  introduced  into  public  life. 

This  impression  will  be  confirmed  if  we  notice  the  largo 
number  of  states  that  have  recently  become  acquainted  with 
the  use  of  sovereign  credit.  In  1862  there  were  quoted 
upon  the  London  Stock  Exchange  foreign  stocks  to  the 
amount  of  £697,830,000 ;  while  the  quotations  of  ten  years 
later  show  the  same  class  of  securities  to  have  expanded  to 
the  enormous  figure  of  £2,430,000,000.  At  the  present  time 
over  one  hundred  states  that  possess  practical  sovereignty  for 
debt  purposes  offer  their  bonds  to  the  choice  of  an  English 
investor,  and  if  to  this  number  were  added  the  obligations 
of  qtiasi  sovereignties,  the  London  market  would  sliow  over 
one  hundred  and  fifty  sorts  of  public  securities.  There  are 
here  found  the  bonds  of  China,  Japan,  Persia,  Siam,  Egypt, 
Liberia,  Orange  Free  States,  Zanzibar,  besides  many  other 
peoples  of  the  Old  World.  The  South  American  states  are 
nearly  all  represented,  while  the  islands  of  the  tropics  and 

'  "  Fcnn  on  tho  Funds."     Introduction,  p.  v. 
2 


^ 


6  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

the  ice-banks  of  the  Arctic  have  also  learned  the  lesson  that 
capital  can  be  had  for  a  promise  to  pay. 

It  is  all  the  more  difficult  to  understand  this  new  method 
of  financiering,  because  it  has  made  its  appearance  while 
wealth  has  been  rapidly  increasing.  The  world  is  daily 
growing  rich.  Nature  yields  her  forces  with  ever-increasing 
willingness  to  serve  the  industrial  purposes  of  men  ;  and 
yet,  notwithstanding  increased  opulence,  the  governments 
of  the  world  are  plunging  headlong  into  debt.  How  are 
these  facts  to  be  explained  ?  From  what  conjunction  of 
circumstances  did  they  spring  ?  "What  are  the  political,  the 
social,  and  the  industrial  tendencies  bound  up  in  this  preva- 
lent custom  of  drawing  bills  on  the  future  ?  And  of  more 
importance  than  all  else,  what  is  the  future  that  this  method 
of  financiering  is  preparing  for  the  world  ? 

It  is  truly  a  difiicult  task  to  read  aright  the  tendencies 
of  one's  own  day.  Those  changes  that  draw  the  deep  lines 
of  history,  and  which  in  the  perspective  of  an  himdred  years 
stand  forth  in  clear  relief,  appear  to  him  whose  life  is  touched 
by  them  as  altogether  wanting  in  significance.  Yet  it  is 
possible,  by  careful  analysis,  to  separate  the  ephemeral  from 
the  permanent,  and  this  task  must  be  undertaken  for  the 
question  now  claiming  our  attention.  For,  until  we  can 
understand  the  facts  pertaining  to  the  history  of  debts,  we 
shall  be  unable  to  decide  whether  this  new  policy  of  treasury 
management  is  a  symptom  of  health  or  of  disease  in  the 
body  politic,  nor  can  we  with  any  satisfaction  pass  judgment 
upon  questions  of  a  technical  nature.  It  then  becomes  our 
first  duty  to  understand  the  facts,  and  to  learn  what  there  is 
in  the  social  and  industrial  life  of  the  present  which  permits 
this  new  theory  of  financiering  to  make  its  way  with  such 
ease. 

It  requires  but  a  slight  study  of  modern  public  debts  to 
perceive  that  an  explanation  of  their  origin  and  development 
can  not  be  the  same  for  all  peoples.  With  some  the  habit 
of  borrowing  money  seems  to  be  indigenous,  having  sprung 
naturally  from  the  political  and  social  relations  of  their  com- 


MODERN  PUBLIC  DEBTS.  7 

plex  civilization ;  but  witli  others  tlie  growth  of  public  debts 
is  largely  the  result  of  imitation,  or  of  foreign  interference. 
There  can  be  no  question  as  to  the  jDroper  order  of  study. 
We  must  first  consider  the  development  of  the  borrowing 
system  among  those  peoples  with  whom  it  is  the  natural 
outgrowth  of  peculiar  relations. 

When  a  responsible  government  desires  to  borrow  money 
it  must  divest  itself  for  the  time  being  of  all  sovereign  powers, 
and  come  before  its  subjects  as  a  private  corporation.  It 
must  bargain  with  those  who  have  money  to  lend,  and  satisfy 
them  as  to  questions  of  payment  and  security.  From  this  it 
follows  that  a  successful  attempt  to  establish  the  borrowing 
system  implies  two  things : 

1.  That  a  money  market  should  have  been  previously 
estabhshed. 

2.  That  there  should  be  found,  either  in  the  structure  of 
the  government  or  in  its  actual  management,  a  guarantee 
against  repudiation. 

Viewed  in  this  light,  the  funding  system  seems  to  be 
capable  of  wide  acceptance  only  among  peoples  whose  labor 
is  of  a  high  grade  of  efficiency,  and  who  have  developed  for 
themselves  representative  government.  But  the  conditions 
here  suggested  call  for  separate  treatment. 

A  market  was  originally  a  place  for  buying  and  selHng, 
"  but  the  word  has  been  generalized,  so  as  to  mean  any  body 
of  persons  who  are  in  intimate  business  relations  and  carry 
on  extensive  transactions  in  any  commodity." '  The  pres- 
ence of  a  market  among  a  people  shows  that  they  are  accus- 
tomed to  deal  in  the  article  sold,  and  that  their  industiy 
supplies  those  things  that  may  serve  as  purchasing  commodi- 
ties. Upon  the  money  market  the  article  sold  is  credits ;  the 
purchasing  commodity,  on  the  other  hand,  is  free  capital. 
The  existence  of  a  money  market,  therefore,  implies  quite  a 
number  of  facts  pertinent  to  our  general  question.  It  im- 
plies, first  of  all,  a  somewhat  advanced  state  of  industrial 

'  Jevons'  "  Theory  of  Political  Economy,"  p.  84. 


g  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

development,  otlierwise  no  capital  would  exist  for  the  pur- 
chase of  credits  offered.  It  implies,  also,  that  some  machinery 
must  have  been  provided  for  gathering  together  the  capital 
of  the  country.  But  of  more  importance  is  the  fact  that  a 
money  market  declares  the  prevalence  of  the  commercial  idea 
in  business.  It  implies  what  the  Socialists  call  "  capitalistic  . 
production."  ^  The  idea  of  satisfying  wants  as  a  motive  to 
industry  has  given  way  to  a  desire  for  riches.  Money  has 
come  to  be  used  as  capital,  and  the  conception  of  profit  is 
ever  present  in  all  business  transactions.'  A  money  market, 
then,  is  a  feature  of  society  peculiar  to  peoples  of  a  some- 
what intense  commercial  life,  and  it  is  only  among  commer- 
cial peoples  that  the  debt  system  can  naturally  arise. 

Turning,  now,  to  the  second  condition  for  the  successful 
establishment  of  the  borrowing  system,  let  us  inquire  why 
men  with  money  are  so  willing  to  purchase  public  bonds. 
What  is  the  basis  of  that  confidence  which  they  repose  in 
governments  ?  As  bearing  upon  this  question,  it  is  a  pecul- 
iar, and  at  the  same  time  a  significant,  fact  that  borrowing 
has  never  been  widely  practised  except  by  republics  or  by 
peoples  possessing,  some  form  of  constitutional  government. 
The  Republic  of  Yenice  is  usually  credited  with  having 
inaugurated  the  policy  of  public  loans.  Holland,  in  fighting 
for  her  freedom,  resorted  to  borrowing  so  freely  that  in  1Y14 
her  citizens  were  bearing  a  per  capita  charge  of  nearly  $8 
for  the  support  of  her  debt.  "William  III,  who  founded  the 
debt  of  England,  was  the  successful  leader  of  the  popular 
party  against  the  usurpation  of  personal  rule.     Instances  of 

'  One  at  all  familiar  with  the  writings  of  Karl  Marx  will  understand  at  once 
what  is  meant  by  this  expression.  Cf.  "  Le  Capital."  The  title  of  the  first 
book  is,  "  Developpement  de  la  Production  Capitaliste."  More  available,  though 
less  acute,  is  Hyndman's  "  Historical  Basis  of  Socialism  in  England."  Cf .  Ch. 
Ill,  which  treats  of  the  rise  of  the  middle  class. 

*  In  speaking  of  the  consequences  of  the  breaking  up  of  the  mediaeval  so- 
cial system,  Cunningham  says :  "  One  result  of  all  these  various  changes  was  the 
appearance  of  a  new  factor  in  the  economic  sphere :  we  now  for  the  first  time 
hear  of  capital,  in  the  modem  sense  of  the  word."  Cf.  "  Growth  of  English  In- 
dustry and  Commerce,"  p.  249. 


MODERN  PUBLIC  DEBTS.  § 

loans  among  other  peoples,  as,  for  example,  the  loans  of 
France  or  of  Spain,  did  not  constitute  a  free-will  transfer  of 
capital  to  the  state,  and  for  that  reason  differed  from  the 
borrowing  of  modern  times. 

As  the  matter  presents  itself  to  my  own  mind,  the  true 
explanation  of  this  trust,  so  generally  reposed  in  modern  gov- 
ernments, is  found  in  the  peculiar  development  of  constitu- 
tionahsm  during  the  past  two  centuries.  The  broad  theory 
of  constitutional  liberty  is  that  the  people  have  the  right  to 
govern  themselves ;  but  the  historical  fact  is  that,  in  the  at- 
tempt to  realize  this  theory,  the  actual  control  of  public 
affairs  has  fallen  into  the  hands  of  those  who  possess  prop- 
erty. 

It  follows  from  this  that  when  property-owners  lend  to 
the  government,  they  lend  to  a  corporation  controlled  by 
themselves.  The  confidence  which  they  repose  in  govern- 
ment does  not  rest  upon  sentiment  or  patriotism,  nor  does  it 
show  greater  integrity  on  the  part  of  people  now  than  in  for- 
mer times;  its  simple  interpretation  is  that  the  possessing 
classes  have  made  their  conception  of  rights  and  liberty  the 
efficient  idea  of  modern  times,  and  that  in  some  way  the 
moneyed  interest  has  captured  the  machinery  of  government. 
Our  modern  political  society  is  properly  characterized  as 
commercial  constitutionalism,  and  out  of  this  fact  arises  such 
guarantee  as  exists  that  moneys  borrowed  by  governments 
will  be  repaid.  If  this  be  accepted  as  correct,  it  is  easy  to 
see  why  any  extended  use  of  public  credit  was  not  possible, 
outside  of  England,  until  the  present  century ;  and  why,  so 
far  as  European  states  are  concerned,  the  funding  system  did 
not  assume  importance  until  about  1848,  for  it  was  not  till 
after  the  events  of  that  year  that  the  commercial  spirit  as- 
sumed control  in  public  affairs. 

Should  one  desire  to  test  the  accuracy  of  this  interpreta- 
tion, he  can  not  do  better  than  study  the  origin  and  develop- 
ment of  the  debt  of  England.  The  founder  of  this  debt 
was  William  III,  who  was  essentially  a  mercantile  monarch, 
and  who,  upon  coming  to  the  throne,  found  in  England  a 


i^ 


10  PUBLIC   BORROWING  AS  A  FINANCIAL  POLICY. 

mercantile  people.^  The  idea  that  swayed  public  opinion  in 
the  eighteenth  century  is  most  clearly  traced  in  the  colonial 
policy.  To  this  all  political  thought  was  subordinated ;  in 
its  interests  all  foreign  policy  was  directed.  At  home  there 
was  the  forming  of  companies,  abroad  there  was  the  found- 
ing of  plantations.  The  domestic  interests  of  Englishmen 
were  absorbed  in  the  greater  interest  of  England.  The  old 
permanent  relations  of  the  sixteenth  century  were  broken 
up,  and  the  tendency  toward  that  disintegration  which  we 
notice  in  our  own  times  had  begun  to  make  its  appearance. 
The  conception  of  profit  familiarized  itself  to  men  of  this 
century  as  the  true  test  of  success  in  business  ventures. 
Steady  industry  for  the  sake  of  gaining  those  things  that 
satisfy  material  desires  was  giving  way  before  enterprises 
inspired  by  the  hope  of  acquiring  great  wealth.  England 
was  the  path-breaking  nation  in  this  industrial  revolution, 
nor  did  continental  peoples  generally  discern  the  true  signifi- 
cance of  her  policy  until  the  present  century. 

At  the  same  time  that  domestic  affairs  were  being  di- 
rected in  the  interest  of  foreign  trade,  the  political  thought 
of  England  was  setting  strongly  against  irresponsible  political 
power.  The  disintegration  of  feudal  society  invited  here,  as 
elsewhere,  the  centralization  of  authority  in  the  hands  of  tlie 
strongest,  but  English  history  differs  from  that  of  most  peo- 
ples in  one  important  particular.  The  people  of  England 
never  acquiesced  in  the  establishment  of  an  irresponsible 
monarchy,  and,  upon  the  failure  of  the  Tudor  and  the  Stuart 
experiments,  it  was  found  that  this  country  had  made  appre- 
ciable advance  in  the  development  of  constitutional  ideas. 
There  arose  a  demand  for  self-goveniment  in  fact  as  well  as 
in  name,  and,  so  far  as  the  landed  and  mercantile  classes 
were  concerned,  such  a  government  was  established.  The 
fruit  of  this  victory  of  aristocracy  over  monarchy  was  the 

'  "  The  age  of  chivalry  passed  away  ■when  the  Puritans  defeated  the 
Cavaliers.  The  establishment  of  standing  armies,  and  the  creation  of  a 
national  debt,  went  to  show  that  money,  not  knighthood,  or  knight's  service, 
gave  force  to  law." — "  Landholding  in  England,"  by  Joseph  Fisher,  p,  89. 


MODERN  PUBLIC  DEBTS.  H 

declaration  of  rights  granted  by  "William  III.  It  appears 
tlien  a  coincidence  with  a  reason  that  this  monarch,  who 
extended  political  freedom  to  the  possessing  classes,  should 
also  have  founded  the  English  debt. 

Turniag,  now,  from  the  estabHshment  of  the  English 
debt  to  consider  the  period  of  its  extension,  we  discover  no 
reason  for  modifying  our  general  conclusions.  This  exten- 
sion took  place  during  the  last  quarter  of  the  eighteenth 
century,  and  was  occasioned  by  the  American  and  JS^apoleonic 
wars.  We  can  not  hope  to  understand  this  period  without 
noticing  the  great  inventions  which  revolutionized  textile 
industries.  The  immediate  effect  of  these  inventions  was 
to  raise  labor  to  a  high  grade  of  efficiency,  and  to  create  in 
English  hands  a  large  surplus  of  manufactured  products; 
but  since  the  commerce  of  England  permitted  her  to  dispose 
of  this  surplus,  the  final  result  was  a  great  increase  in  na- 
tional wealth,  which,  in  its  turn,  served  as  the  basis  for  a 
new  class  in  society,  and  for  the  rise  of  a  new  political  in- 
terest. It  was  in  the  presence  of  such  conditions  that  the 
government  found  itself  in  need  of  funds  to  carry  on  its 
wars,  and  it  became  of  much  importance  to  those  who  were 
charged  with  the  conduct  of  public  affairs,  that  the  manu- 
facturing class  should  be  favorably  disposed.  In  this  man- 
ner there  was  provided  an  opportunity  for  the  new  interest 
to  acquire  political  power,  an  opportunity  of  which  it  was 
not  slow  to  avail  itself.  It  is  not  necessary  to  proceed  farther 
with  this  analysis.  It  is  readily  seen  that  all  the  conditions 
for  public  borrowing  were  even  more  fully  realized  in  the 
latter  part  of  the  eighteenth  century  than  when  the  debt  of 
England  was  first  established.  The  money  market,  and  all 
that  it  implies,  had  become  perfectly  developed,  while  the  prac- 
tical control  over  public  affairs  lay  largely  in  the  hands  of  the 
patrons  of  the  state.  Indeed,  the  relation  that  existed  between 
the  government  and  those  who  loaned  it  money  during  the 
Napoleonic  wars,  is  a  striking  illustration  of  the  political  basis 
of  public  borrowing ;  for  the  fact  is  that  the  borrowing  body 
and  the  lending  body  were  separate  only  as  legal  personages. 


12  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

The  foregoing  analysis  lias  disclosed  to  us  the  general 
conditions  from  which  it  is  possible  for  the  borrowing  system 
to  take  its  rise,  bnt  the  political  necessities  for  borrowing 
must  likewise  be  discovered  before  the  full  significance  of 
credit  financiering  in  modern  life  may  be  portrayed.  It  is 
claimed  by  many  writers  of  recognized  standing  that  an  ex- 
tension of  public  duties,  and  in  consequence  an  increase  of 
public  expenditures,  attends  every  advancing  step  of  civih- 
zation.  This  is  stated  as  a  permanent  law  of  progress,  but 
does  not  appear  to  me  to  be  worthy  such  a  name.  Still  the 
recognition  of  this  law  is  pertinent  to  our  present  purpose, 
for  while  it  can  not  be  brought  into  harmony  with  all  sorts 
of  social  advancement,  it  does  apply  to  that  peculiar  advance 
in  civilization  known  as  nineteenth  century  progress.  It  is 
true  that  the  present  century  has  witnessed  a  great  extension 
of  public  expenditure,  and  that  this  expenditure  has  been  the 
necessary  consequence  of  what  is  termed  modem  civilization. 

It  lies,  then,  within  the  range  of  our  study  to  inquire  re- 
specting the  facts  of  public  expenditure,  so  far  as  may  be 
necessary  to  discover  the  prevalent  tendency  in  treasury 
management.  In  the  table  that  follows,  there  is  presented 
the  total  and  the  per  capita  expenditure  of  the  six  great 
European  peoples  and  of  the  United  States.  It  is  believed 
that  the  figures  are  sufficiently  accurate  to  serve  the  purpose 
for  which  they  are  presented,  yet  it  must  be  admitted  that 
the  task  of  providing  comparative  statistics,  which  shall  in 
all  respects  be  satisfactory,  is  an  extremely  difficult  one — a 
difficulty  that  arises  not  so  much  from  the  paucity  of  data  as 
from  the  diversity  which  exists  in  the  various  systems  of 
public  accounts. 

It  requires  but  a  glance  at  the  rapid  growth  of  per  capita 
expenditure  to  perceive  that  the  increase  in  the  cost  of  gov- 
ernment bears  no  constant  relation  to  the  increase  in  popula- 
tion. Consider,  for  example,  the  figures  of  the  French 
budget.  In  1840,  the  government  of  France  demanded 
from  each  subject  the  sum  of  $6.98,  while  at  the  present 
time  the  per  capita  levy  amounts  to  nearly  three  times  that 


MODERN  PUBLIC  DEBTS. 


13 


< 

a 

U) 
H 
Z 

t"' 
< 

u 

a 
g 

Per  capita  ex- 
penditure. 

o  o  >o  o  ■* 
<p  o  ■<»<  p  «> 
r-i  ii  it  CO  ia 

Total  expendi- 
ture, in  mill- 
ions of  dollars. 

00  p  T(<   CO  p 

i-  O  Jr-  OJ  £- 

(M  rr  i-  a  50 
CO  H 

Per  capita  ex- 
penditure. 

.          •          .    t-    T-l 

•  •    •  in  (M 

•  ;    '  OS  ^ 

l-H 

Total  expendi- 
ture, in  mill- 
ions of  dollars. 

.      .      •  rj<  <0 
•      •      •  CO  (M 
.       .      .  CO  Tj< 

Per  capita  ex- 
penditure. 

•      •      •  to  CM 
II      I*-  » 

Total  expendi- 
ture, in  mill- 
ions of  dollars. 

.      .      .  -Tt<  O 

•  .      •  O  00 

•  •      ■  (M  iM 

1 

Per  capita  ex- 
penditure. 

CO  CO  to  O  O 
t~  p  7-1  O  «5 

oq  .^  lb  >b  0 

Total  expendi- 
ture, in  mill- 
ions of  dollars. 

0  i:~  cc  *-  00 
TJH  to  OS  IM  ■!> 

■4 

M 

Per  capita  ex- 
penditure. 

•  0  to  OS  OS 

•  >-H  0  CO  IM 

I  w  CO  •*  >b 

Total  expendi- 
ture, in  mill- 
ions of  dollars. 

•  CO  •»}<  n  >o 

•  OS  —  ■*  •»*< 

•  rH  IM  CO  -* 

Per  capita  ex- 
penditure. 

00  C-.  t~  ^  ^ 
CS  10  00  00  00 
0  60  OS  0  to 

l-H    1-C 

Total  expendi- 
ture,  in  mill- 
ions of  dollars. 

ir-'*  10  0  (M 
CO   C   to  rH  (M 

(M  CO  CO  ■»}<  to 

0 

^ 

§ 
» 

Per  capita  ex- 
penditure. 

0  0  0  C  (M 

la  p  10  00  0 
OS  OS  .^  0  ,1h 

Total  expendi- 
ture, in  mill- 
ions of  dollars. 

00  <M  Tj<  J>  t^ 

CO  T*  CO  CO  0 

(M  n  CO  CO  •^ 

<4 

0  0  0  0  0 
■^  >a  CD  J.^  00 
00  00  CC  00  00 

tc  a 


c  ^ 


M  > 


•  ^  6B   ". 


O    •- 


a  •^ 


tn 

3 

.£ 

3 

to 
(3 

WJ 

C 

0 

0 

0) 

fl 

0 

13 

ii   r-<  "^ 


e   &• 


S    u 


sum.  The  same  tenden- 
cj  is  observed  in  Prussia, 
though  not  in  so  marked 
a  degree;  but  it  should 
be  remembered  that  the 
period  to  which  our  table 
draws  attention  witnessed 
the  expansion  of  territori- 
al jurisdiction,  and  a  rapid 
increase  of  population,  by 
Prussian  conquest.  It 
should  be  remembered 
also  that  a  smaller  propor- 
tion of  total  expenditure 
finds  its  way  into  the  na- 
tional accounts  in  Prussia 
than  in  France.  The 
English  are  the  only  peo- 
ple whose  budget  does  not 
show  a  decided  tendency 
toward  expansion.  But  it 
must  be  noticed  that  Eng- 
land passed  through  the 
experience  of  rapidly  in- 
creasing expenditure  be- 
fore the  period  contem- 
plated by  this  table,  and, 
what  is  of  more  impor- 
tance, that  many  duties 
are  imposed  upon  the  lo- 
cal governments  which  in 
Prance  are  supported  out 
of  the  central  treasury. 
The  same  is  true  of  the 
United  States.  The  na- 
tional budget  shows  na- 
tional   expenditure   only, 


14  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

and  in  the  figures  presented  in  the  table  the  surplus  over 
ordinary  expenditures  annually  appropriated  to  the  payment 
of  the  public  debt  has  been  excluded.  If  to  these  sums 
were  added  the  cost  of  State,  county,  and  city  governments, 
the  total  expenditure  for  public  purposes  in  this  country 
would  approximate  $700,000,000,  being  a  payment  of  $12.75 
per  capita. 

How  may  this  tendency  toward  an  increase  of  public 
expenditure  be  explained  ?  Is  it  proof  that  modern  states 
are  less  economically  administered  than  formerly,  or  does  it 
indicate  that  their  duties  have  been  extended  ?  An  answer 
to  these  questions  will  disclose  the  purposes  for  which  such 
free  use  has  been  made  of  public  credit. 

A  candid  inquiry  iato  the  administration  of  modern  gov- 
ernments permits  one  to  say,  in  the  first  place,  that  public 
extravagance  does  not  adequately  explain  constantly  grow- 
ing treasury  deficits.  There  have  been  without  doubt  many 
instances  of  unwarranted  expenditure.  The  government  of 
France,  since  1876,  controlled  by  factions  rather  than  parties, 
and  administered  in  connection  with  a  most  corrupt  civil 
service,  is  open  to  the  charge  of  criminal  extravagance.  l!^or 
is  the  United  States,  since  1868,  above  criticism  in  this  re- 
gard. In  Egypt,  also,  as  well  as  in  many  other  countries, 
where  cabinets  and  budgets  are  of  foreign  importation  rather 
than  domestic  growth,  the  administration  of  finances  may  be 
justly  censured.  Still,  when  all  is  said  that  may  be  truly 
said,  public  extravagance  does  not  adequately  account  for 
the  rapid  expansion  of  the  demands  of  modern  governments. 
"We  must  look  deeper  into  the  national  purpose  which  now 
controls  public  senthnent  for  the  explanation  of  the  facts 
here  disclosed. 

A  careful  analysis  of  modern  life  will  disclose  two  ideas, 
distinct  in  their  origin  yet  harmonious  in  their  working,  to 
which  all  political  thought  of  the  present  conforms.  The 
first  of  these  is  nationality,  the  second  socialism  ;  and  so  per- 
tinent are  they  to  the  question  in  hand  that  it  will  be  worth 
our  while  to  consider  them  at  some  length. 


MODERN  PUBLIC  DEBTS.  15 

There  can  be  no  doubt  as  to  tlie  meaning  of  the  word 
nationality,  nor  can  one  for  a  moment  question  the  preva- 
lence and  power  of  this  idea.  It  supplies  the  thi-ead  that 
runs  through  all  Prussian  history;  it  is  the  inspiration  of 
French  policy ;  it  is  the  essence  of  Italian  unity ;  it  is  the 
bulwark  of  the  protective  system  wherever  that  system 
exists.  Even  Englishmen  are  beginning  to  agitate  for  a 
"  Greater  England,"  while  in  the  United  States  there  is  no 
lack  of  that  national  pride  which,  upon  occasion,  would  lead 
this  people  to  sacrifices  the  most  extreme. 

For  countries  that  find  their  defense  from  foreign  inter- 
ference in  their  territorial  situation,  the  influence  of  the  na- 
tional spirit  can  not  be  distinctly  traced  in  public  apjiropria- 
tions.  In  the  United  States,  for  example,  the  pernicious 
workings  of  nationality  do  not  extend  farther  than  this — that 
revenue  machinery  is  used  for  other  than  revenue  purposes, 
and  some  millions  are  annually  paid  on  account  of  tariff  laws 
which  never  find  their  way  into  the  public  treasury.  Other 
people  are  not,  however,  so  fortunately  situated.  The  bound- 
aries of  European  countries  have  been  determined  by  mili- 
tary chieftains.  Territory  is  held  by  the  strongest  nation  so 
long  as  it  continues  to  be  the  strongest,  and  every  govern- 
ment lives  in  constant  dread  lest  the  least  display  of  military 
weakness  should  serve  as  an  occasion  for  the  re-opening  of 
old  disputes.  The  consequence  is  that  Europe  has  become 
an  armed  camp  ;  new  fortifications  mark  new  acquisitions ; 
railroads  are  built  for  military  rather  than  commercial  pur- 
poses ;  and  large  sums  of  money,  as  also  the  services  of  large 
numbers  of  men,  are  annually  sacrificed  to  the  spirit  of  nar 
tionahty. 

In  the  table  immediately  following,  I  have  endeavored  to 
bring  together  in  compact  form  a  few  facts  designed  to  illus- 
trate the  tendency  with  respect  to  modern  armaments.  In 
the  first  column,  under  each  state  considered,  will  be  found 
the  annual  expenditure  for  army  and  navy  for  the  years  end- 
ing each  decade  since  1850.  These  figures  represent  the 
cost  of  the  standing  establishment,  but   do  not  include  war 


16 


PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 


pensions  or  war  debts,  which,  properly  should  be  reckoned  in 
the  military  chapter  of  the  budget.  In  the  second  column 
is  presented  the  peace  footing  of  the  armies.  No  attempt 
has  been  made  to  collate  these  figures  so  that  they  may  serve 
for  comparative  purposes,  and,  indeed,  that  would  be  some- 
what difficult,  owing  to  the  different  methods  of  army 
organization.  In  Eussia,  for  example,  the  civil  police  are 
reckoned  as  part  of  the  standing  army,  while  it  is  well 
known  that  the  word  "  reserve  "  in  England  means  quite  a 
different  thing  from  what  is  suggested  by  its  use  in  France 
or  in  Germany.  The  true  interpretation  of  this  table  appears 
when  its  figures  are  read  from  top  to  bottom.  The  remain- 
ing columns  express  in  another  manner  the  facts  already 
given  respecting  the  standing  army ;  the  one  estimates  the 
army  upon  the  basis  of  each  one  thousand  of  the  inhabitants, 
the  other  upon  the  basis  of  territory  over  which  jurisdiction 
is  maintained. 


Table  showing  Modern  Tei 

ndency 

toward  Armament 

• 

A.  D. 

o 

1  expendi- 
for  army 
7y,  in  inill- 
of  dollars. 

o 

§  . 

S 

I 

A.D. 

"o 
a    . 

11 

1  expendi- 
for  army 
vy,inmill- 
of  dollars. 

§  . 

i. 

2  ©  «  <o 

c  tc  a  a 

fe"^ 

>,S 

C3 

2  2 

«  a)  c!  „ 

s  £  a  c 

^•3 

§5 

§5^.2 

l-s 

i'a 

I5 

g3^.2 

S  a 

|a 

& 

<1 

•< 

<5 

p. 

< 

< 

<! 

England 

Prussia 

1850. 

102,000 

75-5 

3-7 

1-18 

1850. 

122,000 

18-0 

76 

1-2 

1860. 

145,000 

143-7 

5-0 

1-36 

1860. 

212,000 

24-0 

11-7 

2-0 

1870. 

135,000 

112-7 

4-3 

1-10 

iil873. 

(1880. 

402,000 

74-0 

12-4 

2-2 

1880. 

107,000 

127-2 

3-1 

96 

402,000 

87-0 

9-9 

1-9 

France 

Russia 

1850. 

394,000 

99-2 

10-76 

1-4 

1850. 

390,000 

6-0 

6-4 

•047 

1860. 

390,000 

94-0 

10-54 

1-4 

1860. 

557,000 

81-8 

7-9 

-066 

1870. 

404,000 

111-9 

10-63 

1-9 

1870. 

765,000 

1319 

9-8 

-093 

1880. 

502,000 

160-0 

13-58 

2-4 

1880. 

884,000 

174-5 

10-4 

•17 

If  the  figures  of  the  table  are  even  approximately  correct 
they  must  be  accepted  as  satisfactory  evidence  that  the  spirit 
of  nationality  is  responsible  for  having  largely  extended 
public  expenditure.  And  if  we  look  a  little  deeper  into  the 
matter,  we  shall  see  that  much  of  this  expenditure  on  ac- 


German  Empire. 


MODERN  PUBLIC  DEBTS.  17 

count  of  the  military  service  is  of  such  a  sort  as  to  lead  natu- 
rally to  an  accumulation  of  public  debt.  The  implements 
of  destruction,  as  also  the  armaments  of  defense,  for  battle 
on  land  as  well  as  on  sea,  have  been  greatly  changed  since 
1848  ;  a  fact  due  to  the  continuous  development  of  the  sci- 
ence of  war  as  a  department  of  mechanics.  But  every  change 
in  military  equipment  has  demanded  an  immediate  expendi- 
ture of  such  large  sums  of  money  that  no  financier  could 
wisely  meet  the  demand  by  a  single  tax  ;  and  a  loan  to  secure 
money  for  this  purpose  would  scarcely  be  placed,  before  some 
new  improvement  in  the  art  of  devastation  would  call  for 
new  expenditure.  In  this  manner  new  debts  would  be  piled 
upon  the  old.  This  is  the  explanation  of  a  considerable  part  of 
modern  indebtedness.  It  finds  its  purpose  in  intense  nation- 
ality, and  its  occasion  in  the  development  of  military  science. 

"What,  now,  can  be  said  of  the  spirit  of  socialism  in  its  in- 
fluence upon  modern  expenditures  ?  The  word  is,  of  course, 
used  in  its  broadest  sense.  It  should  not  suggest  any  peculiar 
form  of  industrial  organization,  but  bring  rather  to  mind  the 
thought  of  extended  state  functions.^  The  content  of  social- 
ism is  a  set  of  ideas  that  stand  opposed  to  individualism. 
Whenever  governments  disregard  the  rule  of  laissez-faire^ 
and  assume  functions  that  extend  beyond  "  the  protection  of 
persons  and  property  from  violence  and  fraud,"  they  turn 
their  steps  toward  socialism.  Thus  the  support  of  public 
schools  is  socialistic.  Factory  acts,  compulsory  insurance 
acts,  and  laborers'  dwellings  acts  are  commonly  regarded  as 
socialistic.  The  support  of  public  parks,  of  Sunday  amuse- 
ments, of  theatres  and  operas,  as  also  the  administration  of 
the  post-ofiice,  of  railroads,  of  express,  and  of  telegraph,  are 
in  harmony  with  the  theory  of  State  Socialism. 

It  would  unnecessarily  encumber  our  study  to  trace  in  de- 

*  This  use  of  the  word  is  a  concession  to  popular  expression.  The  funda- 
mental conception  that  underlies  socialism  is  the  assertion  of  certain  Bup- 
pressed  rights  in  favor  of  those  who  possess  no  property  except  property  in 
themselves.  The  programme  for  realizing  these  rights  is  but  an  accidental  ac- 
cessory to  socialism.  Mr.  Rae,  in  his  "  Contemporary  Socialism,"  devotes  the 
first  part  of  his  introductory  chapter  to  the  presentation  of  this  fact. 


18 


PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 


tail  tlie  influence  of  modern  socialism  upon  the  develop- 
ment of  modern  budgets,  still  a  few  facts  may  be  appropri- 
ately presented  for  purpose  of  illustration.  There  is  perhaps 
no  chapter  of  financial  history  which  shows  so  clearly  the 
workings  of  this  sentiment  as  that  which  pertains  to  the 
administrations  of  the  French  treasury  since  1868.  This 
short  chapter  divides  itself  into  two  parts,  the  first  covering 
the  period  from  1868  to  1876,  the  second  from  18T6  to  the 
present  time.  The  financial  disturbances  introduced  during 
this  first  period  are  due  to  the  disasters  of  war,  to  the  pay- 
ment of  an  indemnity  of  five  millards  of  francs  to  Germany, 
and  to  the  reorganization  of  the  French  army.  In  conse- 
quence of  these  extraordinary  expenditures,  the  financial  de- 
mands of  the  government  were  greatly  increased  ;  but  the 
people  assented  without  complaint  to  the  burdens  thus  im- 
posed, for  they  regarded  them  as  essential  to  the  maintenance 
of  the  honor  of  France.  By  the  year  18T6  ordinary  income 
had  been  forced  up  to  the  demands  of  expenditure,  and  the 
accounts  of  that  year  showed  a  surplus  m  the  treasury. 
From  this  it  appears  that  a  comparison  of  the  budget  of 
1876  with  that  of  1869  will  disclose  the  exteijt  to  which  the 
financial  administration  of  the  country  had  been  affected  by 
the  disastrous  war  of  1870. 

But  with  the  year  1876  new  demands  began  to  assert 
themselves,  the  influence  of  which  is  easily  seen  in  the  in- 
crease of  public  expenditure.  The  disbursements  of  this 
year,  placed  by  the  side  of  those  of  1883,  show  that  expend- 
itures had  increased  526,000,000  francs.  The  figures  pertain- 
ing to  those  three  years  are  presented  in  the  following  table : 

Expenditure  of  France,  expressed  in  Millions  of  Francs} 


A.  D. 

Ordinary. 

Extraordinary. 

Total. 

1869 

1876 

1688-3 
2680-2 
3027-8 

215-9 
330-5 
5291 

1904-2 
3030-7 

1883 

3556-9 

^  "  fitude  sur  la  Gestion  Financiere  en  France  depuis  1871. 
Noel,  1884,  p.  60. 


Par  Octave 


MODERN  PUBLIC  DEBTS. 


19 


It  appears  from  the  above  that  the  average  annual  in- 
crease in  fiscal  demands  for  the  seven  years  preceding  1883 
amounts  to  75,000,000  francs,  or,  if  ordinary-  expenditures 
only  be  taken  into  the  account,  these  demands  have  grown  at 
the  rate  of  50,000,000  francs  each  year.  "  This  difference," 
says  the  -writer,  upon  -whose  authority  the  figures  are  taken, 
"  is  entirely  due  to  ne-w  tendencies  introduced  into  adminis- 
trative policies,  to  the  demand,  now  become  irresistible,  of 
making  the  government  inspire  and  undertake  all  those  lines 
of  activity  presenting  a  character  of  collective  utility." 
There  is  much  truth  in  this  statement,  as  may  be  seen  by 
tracing  the  increase  in  the  cost  of  government  to  the  items 
of  appropriation,  as  shown  in  the  following  exhibit : 

Ordinary  and  Extraordinary  Expenses  of  the  Civil  Depart- 
ments from  1869  to  1883,  in  millions  of  M-ancs.^ 


PT7,P  A  T^TM^-NTS 

1869. 

1876. 

18S3. 

From  1869  to  1888. 

From  1876  to  1888. 

Increase. 

Decrease. 

Increase. 

Decrease. 

Finances 

20-4 
36-1 
13-8 
60-0 

*25-5 
48-9 
12-4 

12-2 
113-3 

15-4 

24-3 
33-0 
11-3 
98-3 

'39-7 
53-9 

7-1 

18-4 
215-5 

28-4 

19-6 
35-9 
14-3 
68-8 
99 
1,33-8 
53-0 
16-7 

46-6 
579-6 

-5 

8-8 

108-3 
4-1 
4-3 

20-9 
466-3 

-8 
•2 

"*-9 

3-0 

"  V-9 
94-1 

"  V-6 

14-7 
364-1 

496-3 

4-7 

Justice 

Foreign  affairs. . . . 
Interior 

29-5 

Post  and  telegraph. 
Public  instruction. 
Culture 

-9 

Fine  arts 

Agriculture    and 
commerce 

Public  works 

General        govern- 
ment of  Algeria. 

.... 

Total. 

358-0 

531-9 

978-2 

613-2 

1-0 

35-1 

Increas 

3,  612-2 

Increas 

e,  461-2 

It  will  be  noticed,  in  the  first  place,  that  this  table  does 
not  include  military  expenditure,  but  considers  only  the  cost 
entailed  by  the  civil  departments.  The  important  fact  pre- 
sented is  that  the  total  disbursements  for  the  administration 
of  civil  affairs  has  increased  612,200,000  francs  since  the 
year  1869 ;  and  that  this  increase  is  traceable  to  appropria- 


'  "  feude  sur  la  Gestion  Financi^re  en  France  depuis  1871,"  p.  86. 


20  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

tions  for  public  works,  public  instruction,  and  for  the  de* 
partments  of  agriculture  and  commerce.  If  now  tliose 
figures  winch  pertain  to  the  entire  period  be  compared  with 
those  presented  in  the  sixth  and  seventh  columns,  which  por- 
tray changes  in  the  budget  since  1876,  it  will  be  observed 
that  461,200,000  francs  out  of  a  total  of  612,200,000  francs 
is  due  to  very  recent  extensions  of  administrative  functions. 
In  1870  the  state  demanded  but  $10.81  from  each  citizen  of 
France;  at  present  the  per  capita  demand  is  $17,  but  it 
shows  an  ignorance  of  facts  to  charge  the  entire  amount  of 
this  increase  in  public  burdens  to  the  disasters  of  the  Franco- 
Prussian  "War.  A  new  principle  has  made  its  appearance  in 
the  control  of  the  French  budget,  which,  for  want  of  a  bet- 
ter name,  has  been  termed  the  spirit  of  socialism.  ]N"otliing 
is  at  present  said  in  criticism  of  this  principle.  It  may  be 
evidence  of  high  statesmanship  to  employ  the  revenue  ma 
chinery  of  a  state  to  carry  on  public  works. 

I  have  referred  thus  in  detail  to  the  administration  of 
finances  in  France  merely  fqr  the  purpose  of  illustrating  a 
general  tendency.  Many  other  governments,  especially  those 
of  the  British  colonies,  have  borrowed  freely  for  public  im- 
provements of  all  sorts,  and,  when  the  question  of  local  in- 
debtedness shall  claim  our  attention,  it  will  be  observed  that 
municipal  governments  are  not  at  all  backward  in  employing 
their  revenue  machinery  and  their  credit  for  industrial  pur- 
poses. So  important  does  Mr.  Nash  regard  this  tendency 
that,  in  his  treatise  upon  the  public  funds,  he  has  endeavored 
to  separate  those  public  stocks  resting  upon  taxes  from  those 
that  rest  upon  public  works.  Such  a  task  is  of  course  at- 
tended with  great  difficulty,  but,  as  the  result  of  his  estimate, 
it  appears  that  over  $2,000,000,000  of  stocks  represent  pro- 
ductive property  under  the  control  of  indebted  governments.^ 

I  have  thus  endeavored  to  explain  the  rise  and  extension 
of  credit  financiering  among  those  peoples  for  whom  it  is  a 
natural  growth.     But,  if  we  include  in  our  view  the  entire 

*  "  Fenn  on  the  Funds,"  1883.    Introduction,  p.  xvii. 


MODERN  PUBLIC  DEBTS.  21 

list  of  outstanding  obligations,  we  shall  discover  that  the 
funding  system  has  been  adopted  under  conditions  not  con- 
templated by  the  foregoing  explanation.  There  are  many 
peoples  for  whom  constitutional  ideas  are  wholly  foreign, 
who  fail  to  understand  modern  industrial  methods  or  mod- 
ern ideas  of  rights,  but  who  nevertheless  make  frequent  ap- 
peals to  sovereign  credit  to  replenish  an  empty  treasury. 
What  new  meaning  attaches  to  credit  financiering  under  such 
conditions  ?  Without  entering  into  details,  it  may  be  said 
that,  wherever  this  form  of  treasury  management  is  not  indi- 
genous, it  is  traceable  either  to  conscious  imitation  of  Euro- 
peans, or  to  military  or  diplomatic  interference  on  the  part 
of  foreigners.  The  industries  of  such  peoples  may  not  be 
sufficiently  far  advanced  to  supply  a  fund  of  free  capital  from 
which  to  fill  their  o^vn  loan  ;  they  are  consequently  obliged 
to  appeal  to  their  more  wealthy  neighbors.  Having  no  well- 
defined  market  of  their  own,  they  appear  as  borrowers  in  the 
markets  of  London  or  Paris.  This  implies  that  commercial 
relations  have  been  already  established,  and  that  the  people 
who  borrow  are  producers  of  some  commodity  desired  by 
those  who  lend.  From  this  it  appears  that  international  bor- 
rowing is  but  a  phase  of  international  trade.  It  shows  that 
commerce  between  widely  separated  territories,  commonly 
regarded  as  an  exchange  of  goods  for  goods,  may,  like  do- 
mestic trade,  resolve  itself  into  a  sale  of  goods  for  credits. 

But  the  important  feature  of  pubhc  borrowing  by  govern- 
ments of  this  class  makes  its  appearance  when  we  inquire 
what  guarantee  a  foreign  creditor  has  against  repudiation? 
What,  for  example,  is  the  basis  of  that  confidence  entertained 
by  a  citizen  of  England  that,  in  lending  to  Peru  or  Victoria, 
he  is  making  a  safe  investment  ?  This  question,  however, 
has  not  been  introduced  for  the  sake  of  giving  an  immediate 
reply,  but  to  bring  clearly  into  view  an  inherent  difference 
between  domestic  and  foreio^n  borrowine:.  Its  consideration 
will  claim  a  large  share  of  our  attention  in  the  following 
chapter,  which  treats  of  the  political  tendencies  of  public 
debts. 

3 


CHAPTEK  11. 

POLITIOAL   TENDENCIES    OF    PUBLIC   DEBTS. 

It  seems  necessary  to  recognize  the  funding  system  as  an 
established  fact.  Not  only  among  the  great  powers  has  it 
made  its  appearance,  but  those  nations  wanting  in  every  es- 
sential element  of  strength  have  accepted  it  with  equal  will- 
ingness. Evolved  from  the  same  conditions  that  have  given 
form  to  modern  history,  it  stands  as  an  essential  part  of  mod- 
em life.  But  in  the  development  of  society,  every  estab- 
lished fact  comes  itself  to  be  the  center  of  new  influences, 
which,  in  their  turn,  give  direction  to  further  growth.  We 
may,  therefore,  fitly  inquire  what  influence  this  new  policy 
of  financial  control  is  likely  to  exert  upon  the  future  devel- 
opment of  society.  The  study  presented  by  this  inquiry 
falls  naturally  into  three  parts — calling  attention  to  the  politi- 
cal, the  social,  and  the  industrial  workings  of  deficit  finan- 
ciering. The  present  chapter  confines  itself  to  a  considera- 
tion of  the  first  of  these  classes  of  influences,  and  undertakes 
to  discover  the  political  tendencies  bound  up  in  the  use  of 
public  credit  as  a  source  of  revenue. 

The  most  obvious,  as  perhaps  the  most  serious,  of  the  po- 
litical tendencies  that  accompany  credit  financiering,  is  found 
in  the  relation  it  bears  to  constitutional  gover-nment.  Its 
workings  in  this  regard  may  be  very  shortly  and  very  defi- 
nitely stated.  The  funding  system  stands  opposed  to  the 
full  realization  of  self-government.  This  is  not  at  all  diffi- 
cult to  understand.  As  seK-government  was  secured  through 
a  struggle  for  mastery  over  the  public  purse,  so  must  it  be 


POLITICAL  TENDENCIES  OF  PUBLIC  DEBTS.  23 

maintained  through  the  exercise  by  the  people  of  complete 
control  over  public  expenditure.  Money  is  the  vital  princi- 
ple of  the  body  politic ;  the  public  treasury  is  the  heart  of 
the  state ;  control  over  public  supplies  means  control  over 
public  affairs.  Any  method  of  procedure,  therefore,  by 
which  a  public  servant  can  veil  the  true  meaning  of  his  acts, 
or  which  allows  the  government  to  enter  upon  any  great  en- 
terprise without  bringing  the  fact  fairly  to  the  knowledge  of 
the  public,  must  work  against  the  realization  of  the  consti- 
tutional idea.  This  is  exactly  the  state  of  affairs  introduced 
by  a  free  use  of  public  credit.  Under  ordinary  circumstances, 
popular  attention  can  not  be  drawn  to  public  acts,  except 
they  touch  the  pocket  of  the  voters  through  an  increase  in 
taxes ;  and  it  follows  that  a  government  whose  expendi- 
tures are  met  by  resort  to  loans  may,  for  a  time,  administer 
affairs  independently  of  those  who  must  finally  settle  the 
account. 

This  evil  of  the  funding  system  may  be  more  clearly 
presented  through  the  analogy  of  an  argument  with  which 
all  are  familiar.  It  is  sometimes  said  by  writers  upon  finance 
that  direct  taxes  are  the  only  true  taxes  for  popular  govern- 
ments. They  rely  for  such  a  conclusion  upon  the  fact  that 
when  one  pays  a  direct  tax  he  is  conscious  of  the  burden  im- 
posed, and  will  naturally  be  led  to  inspect  with  care  the  pro- 
jects of  the  government.  On  the  other  hand,  it  is  claimed 
that  indirect  taxes  were  invented  as  a  means  of  extracting 
money  from  the  people  in  such  a  manner  as  to  avoid  too 
close  scrutiny  into  public  affairs.  There  is  some  truth  in 
this  view  of  the  case,  although  it  may  be  easily  pressed  too 
far.  "Were  it  possible  for  government  to  be  carried  on  by 
direct  contributions,  the  healthy  jealousy  with  which  each 
individual  would  follow  his  payment  might  do  much  to  con- 
fine fiscal  demands  to  proper  purposes,  and  to  secure  econo- 
my in  the  use  of  moneys  appropriated.  In  this  sense,  di- 
rect taxes  are  more  in  harmony  with  popular  government 
than  indirect  contributions. 

"With  how  much  greater  pertinency  may  this  reasoning 


24:  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

be  applied  to  tlie  employment  of  public  credit  as  a  source  of 
revenue !  A  loan  calls  for  no  immediate  payment  from  the 
people,  but  produces  vast  sums  for  the  government.  It  re- 
quires a  certain  degree  of  thought  to  recognize  that  debts 
imply  burdens,  and  for  this  reason  a  government  that  resorts 
to  borrowing  may  for  a  time  avoid  just  censure.  Loans  do 
not,  like  direct  taxes,  demand  a  visible  payment  from  the 
people  ;  nor,  like  indirect  taxes,  raise  the  price  of  consumed 
articles.  They  address  themselves  rather  to  the  interests  of 
those  who  have  control  over  capital,  and  by  the  promise  of  a 
perpetual  annuity  induce  the  holders  of  money  to  intrust  it 
to  the  state.  The  administration  is  satisfied,  since  its  necessi- 
ties have  been  relieved  without  exciting  the  jealousy  of  the 
people ;  the  lenders  are  satisfied,  since  they  have  secured  a 
good  investment  for  their  capital  and  are  not  bothered  with 
its  management;  while  the  people  are  not  dissatisfied  be- 
cause of  their  profound  ignorance  of  what  has  taken  place. 
Herein  lies  the  danger  of  permitting  a  government  freely  to 
mortgage  its  sovereign  credit. 

So  far  as  the  United  States  is  concerned,  the  danger  of 
public  borrowing  here  brought  to  view  is  more  fully  realized 
in  matters  of  municipal  control  than  in  the  management  of 
State  or  Federal  affairs.  The  facts  that  pertain  to  local 
treasury  management  are  indeed  appalling.  It  is  not  too 
much  to  say  that  every  rule  laid  down  by  the  science  of 
finance  has  been  disregarded  by  American  cities.  Demands 
have  been  made  for  unnecessary  purposes ;  demands  for 
necessary  purposes  have  been  made  in  excess  of  the  require- 
ments of  economical  expenditure ;  while  the  entire  business 
has  been  so  veiled  behind  municipal  bonds  and  suppressed 
contracts,  that  the  public  is  kept  in  general  ignorance  of 
what  is  going  on.  Out  of  a  total  city  indebtedness  of  $682,- 
000,000  as  reported  by  the  census  of  1880,^  the  sum  of  $122,- 
000,000  is  traceable  to  the  funding  of  floating  debts.  There 
is  of  course  a  legitimate  use  that  can  be  made  of  floating 

'  Porter's  "  Report  on  Public  Indebtedness,"  p.  482. 


POLITICAL  TENDENCIES  OF  PUBLIC  DEBTS.  25 

debts,  but  iu  city  administration  tlieir  use  has  been  for  tbe 
most  part  illegitimate.  Without  charging  criminal  corrup- 
tion upon  city  officials,  one  may  say  that  the  true  inter- 
pretation of  this  large  sum  of  floating  obligations  is,  that 
those  in  authority  have  engaged  in  pubhc  duties  while  yet 
the  citizens  were  ignorant  of  the  fact.  One  can  not  suppose 
that  this  would  have  been  permitted,  had  every  increase  in 
expenditure  entailed  an  immediate  increase  in  the  tax  levy. 
The  great  danger  to  self-government  in  the  United  States 
lies  in  municipal  corruption,  and  municipal  corruption  is  in 
large  measure  traceable  to  the  manner  in  which  cities  have 
used  their  credit.  For  American  readers,  this  reference  to 
local  government  is  a  pertinent  illustration  of  a  most  dan- 
gerous political  tendency  of  deficit  financiering. 

But  what  may  be  said  of  the  political  tendencies  of  inter- 
national borrowing?  Usually  an  international  contract  of 
this  sort  lies  between  the  government  of  a  weak  people  on 
the  one  hand,  and  the  subjects  of  a  strong  government  on  the 
other,  and  it  will  assist  our  analysis  if  we  keep  this  fact  in 
mind.  The  tendency  of  foreign  borrowing  is  in  the  same 
direction  as  that  of  domestic  borrowing.  As  the  latter  ob- 
structs the  efficiency  of  constitutional  methods,  so  the  former 
tends  to  destroy  the  full  autonomy  of  weak  states.  The 
granting  of  foreign  credit  is  a  first  step  toward  the  establish- 
ment of  an  aggressive  foreign  policy,  and,  under  certain  con- 
ditions, leads  inevitably  to  conquest  and  occupation. 

The  relation  that  exists  between  foreign  borrowing  and 
the  pohtical  tendency  here  pointed  out  will  be  readily  seen 
if  we  inquire  respecting  the  position  of  international  law 
upon,  unsatisfied  claims  of  any  sort.  This  position  is  stated 
by  Yattel,  as  follows : 

If  one  nation  .  .  .  refuse  to  pay  a  debt,  repair  an  injury, 
or  give  satisfaction  to  another,  the  latter  nation  may  seize 
something  belonging  to  the  former,  and  apply  it  to  her  own 
advantage,  till  she  obtains  payment  of  what  is  due  her,  to- 
gether with  interest  and  damages.^ 

>  "  Law  of  Nations,"  Book  II,  §  342, 


26  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

Sucli  a  seizure  may  not  itself  be  considered  a  reprisal, 
but  it  becomes  a  reprisal  upon  subsequent  refusal  of  tlie 
delinquent  government  to  give  satisfaction ;  sucli  a  seizure, 
therefore,  would  hardly  be  made  unless  the  aggressive  nation 
were  willing  to  support  its  action  by  arms.  A  claim,  then, 
of  such  a  nature  that  one  nation  would  feel  itself  justified  in 
making  seizure  of  the  property  of  another  nation — and  an 
unpaid  debt  creates  such  a  claim — is  recognized  as  just  occa- 
sion for  war. 

But  one  must  further  inquire  if  this  rule  is  at  all  modi- 
fied by  the  fact  that  the  international  obligation  is  not  between 
two  states  in  their  sovereign  capacity,  but  an  obligation  that 
a  state  as  a  sovereign  has  entered  into  with  the  subjects  of 
another  state.  Would  an  unsatisfied  claim  held  by  a  private 
person  against  a  foreign  government  become  a  proper  sub- 
ject for  diplomatic  correspondence,  if  disregarded  by  that 
government  ? 

The  principle  of  law  above  stated  is  not  in  the  least 
modified  by  the  fact  that  the  claim  is  private  rather  than 
pubHc.     Says  Yattel : 

The  property  of  the  individual  is  to  be  considered  in  the 
aggregate  as  the  property  of  the  nation  with  respect  to  other 
states.  It,  in  some  sort,  really  belongs  to  her,  from  the  right 
she  has  over  the  property  of  her  citizens,  because  it  constitutes 
the  total  sum  of  her  riches,  and  augments  her  power.  She  is 
interested  in  that  property  by  her  obligation  to  protect  all  her 
members.* 

Phillimore  treats  directly  the  question  in  hand.     He  says : 

The  right  of  interference  on  the  part  of  a  state,  for  the 
purpose  of  enforcing  the  performance  of  justice  to  its  citizens 
from  a  foreign  state,  stands  upon  an  unquestionable  founda- 
tion, when  a  foreign  state  has  become  itself  the  debtor  of  these 
citizens.^ 

In  1848  this  question  was  raised  in  England,  and  Lord 
Palmerston,  in  a  circular  letter  to  the  British  embassadors, 

>  "Law  of  Nations,"  Book  II,  §  81. 

'  "  Commentaries  upon  International  Law,"  Book  II,  p.  26. 


POLITICAL  TE^TDENCIES  OF  PUBLIC  DEBTS.  £7 

stated  definitely  the  position  of  England  respecting  it.     The 
following  is  quoted  from  that  letter : 

As  some  misconception  appears  to  exist  in  some  of  those 
states  with  regard  to  the  just  right  of  her  Majesty's  Govern- 
ment to  interfere  authoritatively,  if  it  should  think  fit  to  do  so, 
in  support  of  these  claims,  I  have  to  inform  you,  as  the  repre- 
sentative of  her  Majesty's  Government  in  one  of  the  states  in 
which  British  subjects  have  such  claims,  that  is  for  the  British 
Government  entirely  a  question  of  discretion,  and  by  no  means 
a  question  of  international  right,  whether  they  should  or  should 
not  make  this  matter  a  subject  of  diplomatic  negotiation.  If 
the  question  is  to  be  considered  simply  in  its  bearing  upon  in- 
ternational right,  there  can  be  no  doubt  whatever  of  the  per- 
fect right  which  the  government  of  every  country  possesses  to 
take  as  a  subject  of  diplomatic  negotiation  any  well-founded 
complaint  which  any  of  its  subjects  may  prefer  against  the 
government  of  any  other  country,  or  any  wrong  which  from 
such  foreign  government  those  subjects  may  have  sustained.^ 

It  appears,  then,  when  a  sovereign  state  enters  into  a 
contract  with  a  citizen  of  a  foreign  state,  that  any  disregard 
of  the  stipulations  of  the  contract  may  be  made  the  occasion 
of  diplomatic  negotiation ;  and  diplomatic  negotiation  may 
mean  anything,  from  a  polite  request  that  a  complaint  be 
taken  under  advisement,  to  occupation  and  territorial  con- 
quest. Payment  of  a  domestic  debt  may  be  refused  with 
impunity,  but  there  is  no  such  thing  as  repudiation  of  a 
foreign  debt  except  through  the  acquiescence  of  the  govern- 
ment of  w^hich  the  creditor  is  a  citizen. 

It  does  not,  however,  follow  from  what  has  been  said, 
that  the  delinquency  of  any  people  to  meet  their  obligations 
must  necessarily  lead  to  foreign  complications.  No  citizen 
can  demand  from  his  government  the  enforcement  of  a  con- 
tract he  may  hold  against  a  foreign  government.  Whether 
or  not  this  shall  be  undertaken  lies  wholly  within  the  dis- 
cretion of  his  government.  He  can  urge  no  expressed  right 
in  the  matter,  except  so  far  as  this  may  be  included  in  his 
general  right  to  claim  common  protection. 

A  case  arose  a  few  years  ago  in  the  English  courts  which 

^  Quoted  from  Phillimore's  CommentarJes,  Book  II,  p.  27. 


28  PUBLIC  BORROWIXG  AS  A  FINANCIAL  POLICY. 

well  illustrates  this  point.  The  Peruvian  Government  had 
borrowed  money  in  England,  and  mortgaged  the  proceeds  of 
the  sales  of  shipments  of  guano  for  the  payment  of  the  loan. 
The  contract  contained  this  stipulation  :  "  That  the  govern- 
ment specially  and  exclusively  hypothecates  the  whole  of 
the  guano  that  shall  be  imported  into  the  United  Kingdom 
of  Great  Britain  and  Ireland,  and  the  whole  of  the  proceeds 
of  such  guano,  after  deducting  expenses,  to  the  payment  of 
said  bonds  and  a  sinking  fund  for  their  redemption."  The 
proceeds  were  otherwise  appropriated,  and  holders  of  the 
Peruvian  bonds  endeavored  to  obtain  remedy  in  the  courts. 
It  was  held  that  there  was  no  remedy  within  the  power  of 
the  court  for  a  wrong  done  by  a  sovereign  power  in  its 
sovereign  capacity;  for,  if  proceedings  demanded  by  the 
plaintiff  were  allowed,  "  it  might  alter  the  relation  between 
the  two  countries,  and  enable  a  bondholder,  by  aid  of  the 
court  of  chancery,  to  declare  war  against  a  foreign  country." 

The  foregoing  facts  respecting  public  law  are  in  many 
ways  significant.  From  the  analysis  of  the  previous  chapter 
it  was  learned  that  the  T\ade-spread  confidence  of  capitalists 
in  lending  money  to  home  governments  was  evidence  of  the 
influence  of  the  moneyed  classes  in  the  councils  of  the  state, 
and  we  now  perceive  that  the  readiness  with  which  capital- 
ists loan  money  to  foreign  governments  rests  largely  on  the 
same  fact.  Provided  only  that  the  government  borrowing 
money  has  jurisdiction  over  a  docile  people  working  a  rich 
soil,  and  makes  no  pretensions  to  military  or  naval  strength, 
its  bonds  may  be  readily  sold.  They  who  purchase  such 
bonds  place  little  confidence  in  the  honesty  of  the  borrowing 
state,  but  they  have  every  reason  to  rely  upon  the  willing- 
ness of  their  own  government  to  enforce  the  contract. 

But,  in  the  second  place,  the  facts  disclosed  permit  one 
to  understand  how  deficit  financiering,  carried  so  far  as  to 
result  in  an  interchange  of  capital  and  credit  between  peoples 
of  varying  grades  of  political  advancement,  must  endanger 
the  autonomy  of  weaker  states  unable  to  meet  their  debt- 
payments.    Provided  only  that  the  interests  involved  are  of 


POLITICAL  TENDENCIES  OF  PUBLIC  DEBTS.  29 

sufficient  importance  to  make  diplomatic  interference  worth 
the  while,  the  claims  allowed  by  international  law  will  cer- 
tainly be  urged  against  the  delinquent  states,  and  the  citi- 
zens of  such  states  may  regard  themselves  fortunate  if  they 
succeed  in  maintaining  their  political  integrity. 

Many  refuse  to  recognize  the  presence  of  this  political 
tendency  in  the  practice  of  international  borrowing,  and  in 
support  of  their  position  call  attention  to  certain  cases  of 
repudiation  that  have  been  permitted  to  pass  with  impu- 
nity. The  facts  which  they  recite  are  undoubtedly  correct, 
but  it  is  also  true  that  solicitude  for  the  interests  of  bond- 
holders has  led  to  such  interference  with  the  internal  ad- 
ministration of  weak  states  as  practically  to  destroy  their 
independence.  Another  fact,  also,  must  be  permitted  its  due 
importance.  Until  within  a  few  years,  the  English  have 
been  by  far  the  largest  purchasers  of  foreign  bonds ;  but 
since  the  fall  of  the  Russell  ministry  it  has  been  the  policy 
of  England  to  retire  from  the  arena  of  international  poli- 
tics. One  reason,  therefore,  why  the  full  rights  of  debtors 
has  not  been  insisted  upon  is,  that  the  aggressive  measures 
which  the  enforcement  of  those  rights  would  have  required 
were  contrary  to  the  principles  of  England's  j)olicy.  But 
at  the  present  time  England  no  longer  enjoys  the  distinc- 
tion of  being  the  only  people  with  considerable  sums  to  lend. 
The  Germans,  the  French,  and  the  Italians,  have  enlarged 
by  a  considerable  figure  their  investment  in  foreign  loans ; 
and,  under  the  direction  of  that  spirit  of  intense  nationality 
by  which  these  peojDle  are  led,  the  smaller  states  can  not 
longer  expect  that  immunity  from  interference  which  they 
have  enjoyed  in  years  past.  Indeed,  England  herself,  by 
the  imperial  policy  of  a  Tory  administration,  has  been  turned 
from  her  avowed  purpose,  and  now  finds  herself  practical 
dictator  of  Egypt. 

^  It  is  of  some  importance  that  this  tendency  of  interna- 
tional borrowing  to  establish  tributary  relations  should  be 
placed  beyond  question,  and  for  that  purpose  it  may  be  well 
to  inquire  what  the  current  history  of  Egypt  has  to  say  re- 


30  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

specting  the  matter.  Egypt  is  said  to  be  a  dependency  of 
Turkey,  although  by  the  treaties  of  1841,  1866,  and  1873, 
she  secured  administrative  independence.  At  the  present 
time,  Egypt  is  deeply  in  debt.  Upon  July  1,  1882,  her  ob- 
ligations amounted  to  £109,016,650,  classified  as  follows  : 

Funded  debt  (two  fifths  being  preferred  stock) £79,5 14,780 

Secured  upon  estates  revenues 17,583,070 

Secured  upon  tribute  paid  direct  to  loan  agents 11,918,800 

Egypt  is  thus  bearing  a  per  capita  debt  of  £19  15s.,  and 
an  annual  per  capita  charge  of  18s.  4:d.  The  real  weight  of 
these  obKgations  will  be  the  better  perceived  when  one  learns 
that,  in  18T8,  three-fifths  of  the  entire  Egyptian  revenue 
went  to  the  support  of  the  debt  service.  The  greater  part  of 
these  obligations,  about  £80,000,000,  has  been  contracted 
since  1863,  and  under  the  administration  of  Ismael  Pacha. 
According  to  a  report  made  by  Mr.  Cave,  in  1876,  the  evils 
of  Egyptian  financiering  were  due  to  a  combination  of  two 
opposite  causes : 

She  suffers  from  the  ignorance,  dishonesty,  waste,  and  ex- 
travagance of  the  East,  and  at  the  same  time  from  the  vast 
expense  caused  by  hasty  and  inconsiderate  endeavors  to  adopt 
the  civilization  of  the  West.  Immense  sums  are  expended 
upon  unproductive  works,  after  the  manner  of  the  East,  and  on 
productive  works  carried  out  in  the  wrong  way,  or  too  soon.^ 

The  grandeur  of  the  royal  dwellings  is  testimony  to  the 
truth  of  one  part  of  this  statement,  and  the  machinery 
brought  in  from  the  "West,  that  lies  rusting  along  the  roads 
of  the  country,  bears  evidence  to  the  other.  Had  the  per- 
sons who  supplied  the  Khedive  with  money  felt  that  his 
promise  was  their  full  guarantee  for  repayment,  it  is  by  no 
means  sure  that  they  would  have  been  so  lavish  with  their 
credit. 

But  we  are  especially  interested  in  the  international  rela- 
tions established  upon  the  basis  of  these  obligations.  The 
holders  of  these  bonds  are  subjects  of  England,  France,  and 

*  "  Fenn  on  the  Funds,"  p.  424. 


POLITICAL  TENDENCIES  OF   PUBLIC  DEBTS.  31 

Germany,  and  all  that  these  governments  have  done  has 
been  to  protect  the  interests  of  then-  subjects.  The  first  step 
toward  foreign  interference  in  Egyptian  affairs  was  the  ap- 
pointment of  a  special  commission  by  the  British  Govern- 
ment, at  the  request  of  the  Khedive,  to  examine  into  the 
tinancial  condition  of  the  country.  This  request  was  made 
at  the  time  when  England  purchased  certain  shares  in  the 
Suez  Canal  then  belonging  to  the  Egyptian  Government. 
Mr.  Cave,  the  head  of  the  commission,  made  his  report  in 
March,  1876 ;  but,  as  "his  recommendations  did  not  suit  the 
French  financial  houses  which  had  pandered  to  the  Khedive's 
extravagance,"  they  were  promptly  rejected.  Three  months 
later,  Mr.  Goschen  was  requested  by  the  "  council  of  foreign 
bondholders  "  to  represent  their  interests  in  Egypt,  and  with 
him  was  associated  M.  Joubert,  to  look  after  the  interests  of 
French  citizens.  These  gentlemen  proceeded  to  Egypt,  and 
succeeded  in  securing  certain  guarantees  from  that  govern- 
ment for  prompt  attention  to  obligations  in  the  future. 
"Were  it  our  present  purpose  to  learn  if  Egypt  has  been  fairly 
treated  by  her  Christian  neighbors,  it  would  be  necessary  to 
consider  the  terms  of  the  "unification"  scheme  (or,  more 
properly  expressed,  the  refunding  operation)  that  took  place 
in  the  early  part  of  18Y7.  But  our  study  is  not  in  this  sense 
judicial.  The  only  part  of  this  scheme  of  importance  to  us, 
as  illustrating  a  political  tendency  of  public  debts,  is  the 
character  of  the  guarantees  secured  to  the  creditors.  The 
loan  of  1870  was  a  "  viceroy's  loan,"  and  to  insure  its  pay- 
ment the  Khedive  expressed  a  willingness  to  sell  his  estates. 
For  certain  other  loans— those  of  1862,  1868,  and  1873— the 
railways,  which  were  a  special  security,  were  placed  under 
the  direct  control  of  a  commission,  composed  of  two  Eng- 
lishmen, one  Frenchman,  and  two  Egyptians.  Of  this  com- 
mission an  Englishman  was  to  be  chairman.  There  were 
other  provisions  of  this  same  general  character.  Passing 
over  the  following  year,  we  find  that  in  1878  an  additional 
loan  of  £8,500,000  was  placed  by  the  Kothschilds  of  London 
and  Paris.    The  basis  of  this  loan  was  family  property  of  the 


32  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

Khedive,  transferred  to  tlie  state  and  applied  to  the  support 
of  the  debt.  The  sixth  article  of  the  decree  creating  this 
debt  is  as  follows  : 

In  order  further  to  secure  the  said  loan,  a  Special  Com- 
mission will  he  formed  to  administer  the  said  property.  The 
Commission  will  he  composed  of  three  members — an  Egyptian, 
an  Englishman,  and  a  Frenchman  ;  and  it  shall  be  under  the 
direct  control  of  the  Council  of  Ministers. 

The  two  foreign  members  will  be  appointed  by  us  on  the 
nomination  of  their  respective  Governments. 

The  functions  of  the  said  administrators  will  be  as  fol- 
lows : 

(a)  To  manage  the  property. 

ib)  To  collect  the  revenues. 

(c)  To  remit  all  the  net  revenues  to  the  contractors  of  the 


loan. 

To  this  arrangement  both  the  English  and  the  French 
Governments  assented,  although  both,  in  assenting,  disavowed 
all  responsibility  for  Egyptian  affairs.  In  1879  Ismael  Pacha 
was  forced  to  abdicate,  and  in  August  of  that  year  Prince 
Tewfik  was  formally  invested  with  power.  The  practical 
result  of  this  step  was  that  the  entire  administration  of  the 
country  was  thrown  into  the  hands  of  England  and  France, 
through  two  controllers-general.  The  decree  establishing 
these  offices  is  so  pertinent  to  our  subject  that  I  give  it  in 
full.     It  is  as  follows  : 

Art.  1.  The  Controllers-General  have  full  powers  of  in- 
vestigation into  every  public  service  of  the  state,  including 
that  of  the  public  debt.  Ministers  and  all  public  officials 
of  every  rank  are  bound  to  furnish  the  controllers,  or  their 
agents,  with  all  documents  they  may  think  fit  to  require.  The 
Minister  of  Finance  is  bound  to  furnish  them  weekly  with  a 
statement  of  receipts  and  expenditure.  Other  administrations 
must  furnish  the  same  every  month. 

Art.  2.  The  Controllers-General  can  only  be  removed  from 
their  posts  by  their  own  Governments. 

Art.  3.  The  Governments  of  England  and  France  having 
agreed  that  for  the  moment  the  Controllers-General  will  not 
take  the  actual  direction  of  the  public  service,  their  duties  are 
limited  at  present  to  inquiry,  control,  and  surveillance. 

'  "  Fenn  on  the  Funds,"  p.  429. 


POLITICAL  TENDENCIES  OF  PUBLIC  DEBTS.  33 

Aet.  4.  The  Controllers-General  take  the  rank  of  Minis- 
ters, and  will  always  have  the  right  to  assist  and  speak  at  the 
meetings  of  the  Council  of  Ministers,  but  without  the  power  to 
vote. 

Art.  5.  When  they  deem  it  necessary,  the  Controllers  may 
unite  with  the  Commissioners  of  Public  Debt  to  take  such 
measures  as  they  may  deem  fit. 

Aet.  6.  Whenever  they  may  deem  it  useful,  and  at  least 
once  a  year,  the  Controllers  will  draw  up  a  report  on  all  ques- 
tions, for  the  Khedive  and  his  ministers. 

Art.  T.  The  Controllers  have  the  power  of  naming  and 
dismissing  all  officials  whose  assistance  is  of  no  use  to  them. 
They  shall  prepare  a  budget ;  and  monthly  statements  of  all 
salaries  and  all  resources  shall  be  made  to  them.^ 

The  foreign  appointees  under  this  decree  were  Major 
Baring  and  M.  de  Blignieres,  and  their  first  report  contained 
the  information  that  Egypt  was  bankrupt,  and  could  not 
meet  in  full  her  obligations.  The  next  move  was  the  ap- 
pointment of  an  International  Commission  of  Liquidation, 
and,  by  the  constraction  of  this  commission,  the  Egyptian 
debt  question  was  declared  to  be  a  question  of  European 
politics.  Besides  those  states  that  had  already  taken  a  hand, 
Germany,  Austria-Hungary,  and  Italy  were  invited  to  assist 
by  council  and  vote.  It  was  against  such  interference  in 
domestic  administration  that  the  national  party,  headed  by 
Arabi  Pacha,  arose  in  rebellion.  Their  cry  was,  Egypt  for 
tbe  Egyptians.  Perhaps  tbey  meant,  as  was  claimed  in  Eng- 
land, Egypt  for  the  Egyptian  army.  But  what  is  pertinent 
to  the  subject  in  hand  is,  that  this  revolution  led  to  an 
armed  interference,  and  an  armed  occupation  of  the  country 
by  a  foreign  power. 

Such  is  the  story  of  Egypt,  so  far  as  her  bonds  are  con- 
cerned. In  the  Egyptian  question  as  a  whole,  there  are  more 
elements  and  interests  than  those  arising  out  of  the  indebted- 
ness of  the  country.  My  only  purpose  in  presenting  this 
record  is  to  draw  from  current  history  an  illustration  of  the 
claim  that  the  custom  of  foreign  borrowing  endangers  the 
autonomy  of  weak  states ;  and  certainly  the  latest  history  of 

^  "Fenn  on  the  Funds,"  p.  431. 


34  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

this  most  unfortunate  people  serves  perfectly  sucli  a  pur- 
pose. 

Another  illustration,  fully  as  humiliating,  is  found  in  the 
occupation  of  Tunis  by  the  Trench.  Here  the  influence  of 
the  bondholder  is  even  more  clearly  traceable  than  in  the 
case  of  Egypt.  Previous  to  the  late  occupation,  she  had 
among  her  officials  a  French  inspector  of  finance  and  six 
delegates  or  commissioners,  and  the  curious  fact  is,  that  these 
commissioners  were  not  appointed  by  the  governments,  but 
elected  by  the  English,  the  French,  and  the  Italian  bond- 
holders. There  could  not  be  a  fact  more  pertinent  for  show- 
ing what  a  tyranny  individualism,  combmed  with  the  ruling 
idea  as  regards  property,  is  preparing  for  the  world ;  or  how 
that  a  princijple  which,  abstractly  considered,  is  most  just, 
may,  in  its  extreme  workings,  destroy  the  very  claim  to 
justice  upon  which  it  at  first  rested. 

But  our  analysis  of  the  political  tendencies  of  interna- 
tional borrowing  is  not  yet  complete.  It  is  not  alone  that 
the  weaker  states  are  in  danger  of  losing  their  administrative 
integrity  that  draws  our  solicitous  regard  to  this  subject. 
Such  a  result  might  not  be  altogether  a  misfortune,  should 
the  period  of  their  subjection  serve  as  an  apprenticeship  in 
good  government.  Of  equal  importance  is  the  fact  that 
widely  extended  credit  relations  introduce  new  and  perplex- 
ing complications  between  the  greater  powers  themselves. 
It  is  not  difiicult  to  see  how  this  comes  about.  When  a  first- 
class  power  obtains  control  over  a  smaller  state  its  weight  is 
increased  in  the  councils  of  the  nations.  The  established 
balance  of  power  is  thereby  destroyed,  and  the  diplomacy  of 
suspicion  is  introduced.  For  example,  the  occupation  of 
Egypt  by  England  means,  whatever  the  government  may 
say,  practical  control  of  Egyptian  affairs.  As  a  consequence, 
the  other  powers  of  Europe  demand  either  that  they  shall 
have  a  voice  in  giving  direction  to  that  control,  or  that  Eng- 
land shall  not  interfere  with  their  schemes  of  the  same  sort. 
The  international  conference  of  1884,  called  to  take  under 
advisement  the  question  of  Egyptian  finances,  is  of  too  recent 


POLITICAL  TENDENCIES  OF  PUBLIC  DEBTS.  35 

an  occurrence  to  call  for  a  detailed  account.  It  was  proposed 
by  Mr.  Gladstone  to  reduce  the  interest  upon  the  Egyptian 
debt.  France  would  not  consent  to  this,  and  Germany,  for 
reasons  known  best  to  herself,  upheld  the  decision  of  France. 
England  was  therefore  obliged  to  proceed  with  her  plan  for 
reform  upon  her  own  authority,  and  when  she  projjosed  to 
divert  certain  revenues  from  the  sinking-fund  to  other  pur- 
poses the  powers  of  Europe  protested.  Thus  this  Egyptian 
question,  pressed  upon  the  attention  of  governments  by  the 
interests  of  bondholders,  bids  fair  to  become  one  of  the  most 
serious  of  modern  problems. 

It  appears  from  our  foregoing  study  that  there  are  three 
distinct  and  decided  political  tendencies  bound  up  in  the 
practice  of  modern  financiers.  It  obviates  the  free  workings 
of  constitutional  governments ;  it  endangers  the  autonomy 
of  inferior  states ;  it  introduces  compHcations  of  a  serious 
nature  between  the  larger  powers.  Nor  can  it  be  said  that 
these  tendencies  are  without  practical  interest  to  the  people 
of  the  United  States.  It  is  the  acknowledged  purpose  of  the 
citizens  of  this  country  to  reahze  the  principles  of  Democracy 
under  tlie  form  of  a  Kepublican  government.  That  which 
the  great  numbers  demand  is  self-government ;  but,  as  has 
been  pointed  out,  the  employment  of  public  credit  works 
against  the  attainment  of  this  purpose.  It  comes  then  to  be 
of  the  highest  moment  that  this  theory  of  treasury  manage- 
ment, if  employed  at  all,  should  be  employed  under  tlie 
guidance  of  strict  financial  rules. 

With  regard  to  the  danger  to  political  autonomy  entailed 
by  a  free  use  of  public  borrowing,  the  United  States  has  no 
cause  for  apprehension.  For  not  only  is  this  country  at  pres- 
ent independent  of  European  money  markets,  but  her  strength 
as  a  nation  would  forbid  any  interference  with  her  internal 
affairs.  But,  on  the  other  hand,  there  are  many  reasons  wby 
the  United  States  should  be  on  her  guard  against  diplomatic 
complications  arising  from  the  prevalence  of  public  borowing. 
Many  of  the  peoples  of  Central  and  South  America  are 
debtors  in  large  amounts,  and  their  bonds  are  held  in  Europe. 


36  PUBLIC  BOKROWING  AS  A  FINANCIAL  POLICY. 

Suppose  payment  on  these  bonds  to  be  delayed,  what  has  the 
United  States  to  say  should  foreign  governments  proceed  on 
the  accustomed  lines  of  diplomatic  interference  ?  Shall  our 
country  permit  England  and  France  to  repeat  on  this  side  of 
the  Atlantic  the  Egyptian  or  the  Tunisian  episode  ?  Shall 
European  creditors  be  allowed  to  appoint  cabinet  officers  in 
any  American  Republic  ?  The  Monroe  doctrine  is  all  that 
can  be  opposed  to  such  a  policy,  but  the  Monroe  doctrine 
has  never  been  accepted  as  part  of  international  law.  It  is 
merely  the  expression  of  a  sentiment  on  the  part  of  the 
people  of  this  country,  and  may  require  the  argument  of 
force  to  secure  for  it  general  recognition.  The  attempt  made 
by  England,  France,  and  Spain  to  obtain  from  Mexico  some 
"  material  guarantee "  for  the  payment  of  certain  claims 
forms  part  of  the  history  of  the  immediate  past.  In  this 
instance,  as  will  be  remembered,  the  movement  failed.  The 
United  States  happened  at  the  time  to  have  an  army  and  a 
navy,  and  the  statement  of  the  Monroe  doctrine  by  Mr. 
Seward  carried  with  it  some  weight.  It  soon  became  ap- 
parent to  England  and  Spain  that  France  was  acting  in  bad 
faith,  and  they  withdrew  from  the  enterprise ;  while  the  fact 
that  the  claims  urged  by  Napoleon  III  were  in  themselves 
spurious,  took  from  the  Emperor  the  sympathy  of  his  own 
subjects,  and  rendered  him  the  laughing-stock  of  Europe  for 
thus  endeavoring  to  bring  into  the  present  century  the  politics 
of  the  court  of  Louis  XIY.  But  the  issue  of  this  particular 
enterprise  is  of  slight  importance.  It  is  the  fact  that  France 
undertook  the  conquest  of  Mexico,  basing  her  claims  for 
action  upon  unsatisfied  obligations,  that  renders  the  question 
of  international  indebtedness  of  importance  to  the  United 
States. 

Another  thought  is  naturally  suggested  in  this  connection. 
According  to  the  constitutional  law  of  the  United  States, 
the  several  States  of  this  Union  are  clothed  with  complete 
sovereignty  so  far  as  the  employment  of  their  credit  is  con- 
cerned. That  is  to  say.  Federal  law  can  exercise  no  control 
over  questions  of  local  indebtedness.    But  international  law 


POLITICAL   TEXDEXCIES   OF  PUBLIC   DEBTS.  37 

declares  that  an  unsatisfied  obligation  constitutes  a  just  oc- 
casion for  diplomatic  interference.  Suppose,  now,  one  of 
these  local  governments  to  repudiate  a  debt,  and  that  a  foreign 
power  desires  to  protect  the  interests  of  its  citizens  who  may 
be  holders  of  the  bonds — to  whom  can  it  present  its  demands 
for  redress  ?  It  would  certainly  be  useless  to  present  them 
to  the  States,  for  such  demands  involve  questions  of  peace 
and  war,  and  for  that  reason  are  assigned  by  the  Federal 
Constitution  to  the  control  of  the  Federal  Government. 
There  is  thus  suggested  a  curious  anomaly  in  American  law. 
The  Federal  Government  is  imposed  with  a  duty  of  negotiat- 
*ing  upon  a  question  over  which  it  has  no  control ;  while  the 
States  are  permitted  to  institute  proceedings  for  the  conse- 
quences of  which  they  are  not  responsible.  It  may  be  that, 
in  the  light  of  our  past  history,  this  condition  of  affairs  does 
not  constitute  a  practical  criticism  upon  American  institutions, 
but  it  certainly  discloses  a  lack  of  harmony  in  public  law. 

If,  however,  the  relation  of  debtor  and  creditor,  assumed 
in  the  above  instance,  be  reversed,  another  class  of  possible 
foreign  complications  is  at  once  suggested.  The  citizens  of 
this  Republic  have  as  yet  shown  no  inclination  to  invest  in 
the  obligations  of  foreign  peoples,  because  greater  profit  has 
been  secured  from  other  methods  of  placing  capital.  But 
when  we  notice  the  amount  of  wealth  in  this  country,  and' 
the  extent  to  which  it  is  concentrated,  when  we  perceive  that 
the  field  of  industry  is  continually  becoming  narrower,  and 
when  to  these  facts  we  add  that  the  Federal  debt  is  in  rapid 
course  of  expungement,  and  that  the  constitutional  limitations 
placed  upon  the  States  and  minor  civil  divisions  exclude 
them  from  the  money  market  as  borrowers,  we  are  led  to 
recognize  the  increasing  difficulty  of  safely  and  profitably 
investing  free  capital.  It  would  not,  therefore,  be  at  all 
strange  should  capitalists  in  this  country  begin  to  show  a 
personal  interest  in  the  fluctuation  of  foreign  stocks.  It  lies 
altogether  within  the  range  of  possibilities  that  the  city  of 
New  York,  like  the  cities  of  London  and  Paris,  should  be- 
come a  storehouse  of  capital  to  which,  the  sovereigns  of  petty 
4 


lib 


38  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

states  may  resort  to  fill  their  depleted  treasuries.  This  ten- 
dency is  fraught  with  danger  to  the  policy  of  isolation  thus 
far  maintained  by  the  United  States,  and  it  becomes  an  im- 
portant question,  what  attitude  this  country  should  assume 
with  regard  to  the  interests  of  those  who  place  their  funds 
beyond  the  control  of  American  law.  One  of  two  policies 
must  be  delared,  nor  ought  the  nation  to  be  permitted  to 
drift  in  this  matter.  Either  citizens  of  this  Eepublic  should 
know  that  money  placed  in  foreign  bonds  is  at  their  own 
risk,  or  they  should  prepare  themselves  to  see  questions  of 
foreign  policy  become  much  more  important  than  they  now 
are. 

It  seems,  then,  from  whichever  point  of  view  we  con- 
sider the  question,  that  the  United  States  can  not  reasonably 
expect  to  avoid  political  complications  sure  to  come  with  an 
extension  of  international  credits ;  and  it  is  on  this  account 
desirable  that  the  Federal  Government  should  present  a 
clearly  formulated  policy,  upon  which  the  public  may  rely. 


CHAPTER  III. 

SOCIAL   TENDENCIES   OF   PUBLIC   DEBTS. 

Not  a  few  of  those  who  observe  social  facts  are  inclined 
to  discover  in  all  political  and  industrial  relations  evidence 
of  social  injustice.  For  such,  public  debts  have  ever  been 
a  favorite  topic  of  study.  It  is  undoubtedly  true  that  our 
present  social  order  provides  abundant  evidence  of  unfair- 
ness as  between  man  and  man.  The  great  class  of  non-pos- 
sessors have  a  case  which,  if  properly  presented  to  the  moral 
sense  of  the  world,  would  secure  judgment  in  their  favor ; 
but  they  may  pertinently  inquire  if  their  case  is  not  weak- 
ened by  the  usual  discourse  of  their  advocates  respecting 
public  debts.  Indeed,  the  greater  part  of  what  is  said  upon 
this  subject  shows  an  imperfect  analysis  of  social  relations, 
and  fails  altogether  to  distinguish  between  causal  and  result- 
ant facts. 

For  a  rational  discussion  of  the  question  here  brought  to 
our  notice,  it  will  be  necessary  first  to  state  clearly  what  is 
meant  by  a  social  tendency.  This  phrase  is  properly  appre- 
ciated when  it  brings  to  mind  all  those  forces  which  in  any 
way  influence  the  relation  of  classes  in  society.  There  are, 
however,  but  two  ways  in  which  a  social  tendency  may  mani- 
fest itself.  It  may  work  some  change  in  existing  classes,  or 
it  may  lend  its  influence  to  render  permanent  such  classes  as 
are  already  established.  The  only  social  tendency  exerted  by 
public  debts  is  of  this  second  sort. 

It  may  be  urged  as  against  this  claim  that  large  fortunes 
have  been  made  by  the  purchase  of  bonds  at  low  prices,  and 


40  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

tlieir  subsequent  sale  upon  a  rising  market.  For  example, 
when  the  first  Federal  Administration  declared  its  intention 
to  make  provision  for  the  payment  of  the  debt  incurred 
during  the  Revolutionary  War,  the  price  of  outstanding  paper 
rose  rapidly  upon  the  market.  Even  before  Hamilton's  re- 
port upon  public  credit,  public  securities  had  experienced  a 
rise  of  nearly  one  hundred  per  cent,  as  compared  with  what 
they  were  in  the  early  part  of  1789.  There  were,  indeed, 
some  very  pretty  fortunes  made  by  those  who  "  expressed 
their  confidence  in  the  government,"  and  purchased  its  obli- 
gations at  thirteen  cents  on  the  dollar. 

The  financial  conduct  of  the- late  civil  war  also  offered  a 
rich  harvest  to  the  money-lender.  The  net  proceeds  of  loans 
during  the  continuance  of  that  war  was  $2,565,000,000. 
But  this  sum,  which  was  received  in  depreciated  paper,  rep- 
resented a  gold  value,  estimated  on  the  basis  of  quarterly  re- 
turns, of  but  $1,705,000,000.  The  difference  between  these 
two  sums  shows  the  amount  of  fictitious  capital  that  fell  into 
the  pockets  of  those  who  "  trusted  the  government  in  its  time 
of  distress."  A  similar  result  followed  upon  the  refunding 
operations  of  1870.  Federal  bonds  which  were  taken  at 
100  have  since  risen  to  120,  thus  giving  to  those  who  sell 
them  a  premium  of  twenty  dollars  for  every  one  hundred 
dollars  invested,  in  addition  to  the  ordinary  interest  pay- 
ments while  the  bonds  are  held. 

It  must  then  be  admitted  that  fortunes  have  been  made 
by  dealing  in  government  paper.  In  a  slight  degree,  also, 
such  results  may  be  regarded  as  the  natural  workings  of 
deficit  financiering,  for  it  is  true  that  bonds  issued  during  the 
continuance  of  a  fiscal  emergency  will  not  command  their 
normal  price.  Still  this  can  not  be  accepted  as  proof  that 
the  policy  of  public  borrowing  contains  a  decided  tendency 
toward  the  separation  of  classes  on  the  basis  of  property. 
Private  fortunes  made  by  dealers  in  bonds  may  be  evidence 
merely  of  bad  financial  management  on  the  part  of  the  ad- 
ministration ;  but  of  more  importance  is  the  consideration  re- 
ferred to  in  the  first  chapter  of  this  treatise,  that   private 


SOCIAL  TENDENCIES  OF  PUBLIC  DEBTS,  41 

property  must  have  been  concentrated  to  a  considerable  de- 
gree before  the  borrowing  system  could  bave  been  developed. 
Men  hold  bonds  because  they  are  rich,  they  do  not  become 
rich  by  holding  bonds.  At  least  this  will  not  be  the  case 
when  bonds  are  issued  and  managed  according  to  sound  rules 
of  finance. 

But  has  such  a  conclusion  any  practical  significance? 
There  are  a  few  writers  who  advocate  repudiation  of  public 
indebtedness  as  a  first  step  in  the  solution  of  the  problem  of 
industrial  inequality,^  and,  from  the  above  analysis,  the  fu- 
tility of  such  a  proposal  becomes  apparent.  The  placement 
of  a  public  debt,  while  it  may  create  a  bondholding  class, 
does  not  create  the  class  of  rich  men  who,  by  lending  their 
wealth  to  the  government,  become  bondholders.  The  exist- 
ence of  such  a  class  is  but  one  of  the  many  manifestations 
of  inequality  in  possessions.  It  is  a  resultant,  not  a  causal 
fact ;  and  on  this  account  it  is  unreasonable,  because  of  indig- 
nation at  the  manner  in  which  our  century  lays  its  burdens 
and  bestows  its  benefits,  to  advocate  the  arbitrary  expunge- 
ment of  all  public  obhgations.  Such  a  proposal  displays  lack 
of  critical  judgment.  It  is  inadequate  to  the  end  sought, 
because  not  addressed  to  the  final  cause  of  that  of  which 
complaint  is  made. 

This  question,  however,  presents  itself  in  a  httle  different 
light  when  we  consider  the  tendency  of  deficit  financiering 
to  render  permanent  such  class  relations  as  are  already  estab- 
lished. The  social  significance  of  public  debts  springs  from 
the  fact  that,  wherever  existing,  the  citizens  of  a  state  are 
divided  into  two  classes — those  who  pay  taxes  for  the  sup- 
port of  the  debt,  and  those  who  receive  interest  payments  ouT 
of  the  proceeds  of  the  taxes.  It  is  not  intended  to  imply 
that  holders  of  bonds  form  a  distinct  class  in  the  commu- 
nity, but  rather  that  there  always  exists  in  a  country  bur- 
dened with  debt  an  interest  peculiar  to  the  holders  of  bonds. 

'  Cf.  "  Brief  Reasons  for  Repudiation  Applicable  to  the  War  Debts  of  all 
Countries,"  by  Isaac  Butts.     1869. 


42  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

And  when  we  remember  tliat  industrial  leisure,  rendered 
possible  by  proprietorship  in  fixed  investments  of  any  sort,  is 
a  habit  easily  acquired,  we  may  discern  how  the  funding  sys- 
tem readily  lends  its  influence  to  the  permanency  of  class 
relations. 

This  effect  of  deficit  financiering  may  be  seen  in  the  sen- 
timent that  always  controls  the  moneyed  classes  with  refer- 
ence to  the  debt  payment.  Whenever  a  great  national  emer- 
gency demands  tlie  creation  of  a  debt,  the  enthusiasm  of 
patriotism  leads  to  its  willing  support,  but  it  is  nevertheless 
regarded  as  a  public  calamity.  When,  however,  the  finances 
of  the  country  become  adjusted  to  the  annual  interest  pay- 
ments, and  the  people  accustom  themselves  to  the  taxes  re- 
quired, one  may  hear  from  influential  quarters  frequent  ex- 
pression of  the  opinion  that  the  permanence  of  a  national 
debt  is  essential  to  commercial  interests.  This  has  been  the 
result  in  the  United  States  of  twenty-five  years'  acquaintance 
with  public  bonds  used  as  commercial  paper.  One  of  the 
foremost  papers  of  the  city  of  New  York  endeavored  recently 
to  arouse  sentiment  against  the  rapid  payment  of  the  public 
debt  by  charging  upon  that  policy  the  business  depression 
affecting  the  country.  Its  argument  was  that  good  invest- 
ment could  not  be  found  for  as  much  free  capital  as  was 
thrown  upon  the  market  by  payment  of  the  debt,  and  that 
no  capital  would  seek  investment  because  the  rate  of  profit 
was  in  this  manner  forced  to  a  low  figure.  The  suppressed 
conclusion  involved  in  this  bad  logic  is  that  the  government 
should  continue  to  tax  the  people  for  money  with  which  to 
continue  the  payment  of  interest  upon  its  debt  rather  than 
flood  the  market  with  free  capital.  I  observed  another  illus- 
tration of  this  same  tendency  when  reading,  a  few  years  ago, 
the  proceedings  of  the  Bankers'  Association.  A  leading 
citizen  of  Chicago,  speaking  before  that  body,  expressed  the 
opinion  that  this  country  could  not  afford  to  reduce  its  debt, 
for  the  payment  of  the  debt  endangered  the  national  banking 
system.  Such  expressions  as  these  show  how  easy  it  is  for 
men  to  convince  themselves  that  what  proves  to  be  of  per- 


SOCIAL  TENDENCIES  OF  PUBLIC  DEBTS,  43 

sonal  advantage  must  of  necessity  benefit  the  community  at 
large,  and  they  are  illustrations,  also,  of  the  fact  that  class 
interests  easily  crj'stallize  under  the  influence  of  an  extended 
and  permanent  system  of  indebtedness. 

It  should  be  further  noticed,  in  this  connection,  that  the 
social  influences  which  accompany  the  employment  of  sover- 
eign credit  depend  largely  upon  the  manner  in  which  public 
funds  are  distributed  among  the  citizens  of  a  debtor  state. 
The  opinion  is  quite  prevalent  that  a  widely-difiused  debt 
indicates  a  healthy  condition  of  political  and  industrial  so- 
ciety. Thus  it  is  the  constant  theme  of  self-gratulation  on 
the  part  of  French  writers  that  so  large  a  number  of  French 
subjects  are  enrolled  as  creditors  of  the  state.  This  fact  dis- 
closes what  they  call  the  democratization  of  the  public  funds. 
("  On  voit  cojTibien  la  rente  etait  detnocratisee.'''')  Between 
1870  and  1876,  the  debt  of  France  doubled  in  amount,  but 
the  holders  of  the  debt  increased  by  four  times  the  original 
number;  Upon  December  31,  1876,  the  number  of  titles 
upon  the  books  is  said  to  have  reached  the  enormous  figure 
of  4,404,763.^  Viewed  as  a  purely  financial  question,  how- 
ever, it  is  no  occasion  for  congratulation  that  a  debt  is  widely 
diffused.  Not  only  is  its  management  necessarily  more  ex- 
pensive, but  the  facility  offered  to  politicians  to  use  the  debt 
for  party  and  personal  ends  often  defeats  the  best  purposes 
of  the  financier.  This  same  France,  for  example,  continued 
to  pay  for  a  number  of  years  a  higher  rate  of  interest  than 
was  necessary  because  the  government  feared  the  voting 
power  of  the  holders  of  rentes.^  ISTor  do  industrial  consid- 
erations necessarily  lead  to  the  approval  of  a  widely-diffused 
debt.  The  pnf ailing  indication  of  a  healthy  state  of  indus- 
feies'is  found  in  the  personal  attention  of  all  members  of 
society '  to  Iklsiness  affairs,  and  this  can  only  come  with  per- 
sonal interest  in  some  particular  form  of  product.  In  so  far 
as  the  private  income  of  individuals  arises,  from  payments  of 

'  "  Trait6  de  la  Science  des  Finances,"  Leroy-Beaulieu,  vol.  ii,  p.  544. 

*  '•  Les  Finances  de  la  Republique,"  H.  Le  Tresor  de  la  Rocque,  pp.  24-29. 


44  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

interest  by  the  state,  tlie  public  is  deprived  of  the  beneficial 
workings  of  that  solicitous  care  which  insures  success  in  in- 
dustrial  ventures.  If  one  traces  to  its  origin  the  sentiment 
that  favors  a  large  rather  than  a  small  number  of  pubhc 
creditors,  he  will  find  that  it  springs  almost  entirely  from 
social  considerations.  ■ 

It  may  be  interesting  to  inquire  respecting  the  holding 
of  Federal  bonds  in  the  United  States.  In  this  respect,  as 
upon  most  questions  pertaining  to  finance,  the  customs  of 
the  American  people  difier  widely  from  those  of  the  French. 
There  is  presented  in  this  country  the  spectacle  of  a  highly 
centralized  public  debt.  One  need  not  fear  that  a  popu- 
lar vote  will  demand  the  maintenance  of  public  obligations 
as  a  convenient  species  of  productive  property,  or  that 
the  government  should  continue  a  larger  interest  pay- 
ment than  the  stipulation  of  the  bonds  or  the  condition  of 
the  market  requires.  The  only  source  of  information  re- 
specting the  distribution  of  Federal  obligations  is  the 
report  upon  public  indebtedness  that  forms  part  of  the 
publications  of  the  tenth  census.  The  facts  presented, 
therefore,  pertain  to  the  year  1S80,  but  there  is  no  reason 
to  believe  that  the  relations  disclosed  have  been  materially 
modified. 

The  registered  debt  of  the  United  States,  as  it  appeared 
during  the  summer  of  1880,  amounted  to  $1,173,749,250. 
Now,  the  reader  is  especially  requested  to  notice  the  number 
of  deductions  that  must  be  made  from  this  sum  before  the 
question  of  personal  holding  by  citizens  of  this  country  can 
be  discussed  at  all,  for,  if  these  deductions  be  lost  sight  of, 
the  figures  presented  will  not  adequately  iheasure  the  con- 
centration of  bondholding  interests.  In  the  first  place,  our 
present  calculation  has  nothing  to  do  with  the  amount  owned 
by  foreigners ;  as  this  amount  was  found  to  be  $27,894,350, 
there  remains  $1,145,854,900  to  be  accounted  for  among  the 
citizens  of  the  United  States.  Of  this  sum,  $319,937,800 
was  held  by  the  national  banks,  as  security  for  their  circula- 
tion, which  must  also  be  deducted  from  the  gi-and  total ;  for 


SOCUL  TENDENCIES  OF  PUBLIC  DEBTS. 


45 


not  only  is  its  chief  social  influence  exerted  througli  its  con- 
nection with  the  circulating  medium  of  the  country,  but  it  is 
under  cor^^orate  and  not  personal  holding.  The  census  au- 
thorities further  excluded  from  their  final  analysis  the  sum 
of  $180,926,700  of  six  per  cents.^  As  a  result  of  these  vari- 
ous deductions,  there  remains  the  sum  of  $644,990,400 ;  but 
there  is  included  in  this  a  large  amount  of  debt,  the  property 
of  private  banks,  insurance  companies,  trust  companies,  and 
other  corporations,  calling  for  a  yet  further  deduction  of 
$227,451,550.  It  thus  appears  that  out  of  a  total  of  over 
one  billion  of  registered  debt,  private  citizens  of  the  United 
States  were  proprietors  of  the  comparatively  small  sum  of 
$417,538,850. 

The  amount  subjected  by  the  census  authorities  to  a 
classified  analysis  is  $644,000,000,  made  up  of  bonds  bearing 
respectively  4,  4|-,  and  5  per  cent  interest.  The  various 
sums  for  each  class  of  bonds,  as  well  as  the  number  of  hold- 
ers in  each  class,  is  presented  in  the  following  table,  to  which 
is  added  a  similar  classification  of  the  six  per  cents  already 
spoken  of : 


LOANS. 

Number  of 
holders. 

Amoonts. 

Holders, 
per  cent. 

Amount, 
per  cent. 

4  per  cent 

4-1  per  cent 

5  per  cent 

55,278 

10,745 

9,091 

7,688 

8384,742,800 
125,631,300 
134,616,300 
180,926,700 

68-41 
13-30 

8-78 
9-51 

46-58 
15-22 
16-29 

6  per  cent 

21-91 

Totals 

80,802 

825,917,100 

100-00 

100-00 

*  The  statement  of  the  report  with  rcfjard  to  these  bonds  is  as  follows :  "  The 
interest  on  the  6  per  cent  bonds  of  1880  and  1881  was  made  payable  semi- 
annually (July  and  January),  in  the  ten  principal  cities  of  the  country,  New- 
York,  Boston,  Philadelphia,  Baltimore,  Chicago,  Cincinnati,  Washington,  San 
Francisco,  St.  Louis,  and  New  Orleans,  and  not  sent  direct  by  draft  to  the  hold- 
ers. The  treasury  books  were  sent  direct  to  the  sub-treasuries  of  these  cities, 
and  the  owners  or  persons  authorized  called  and  receipted  for  the  interest. 
These  bonds,  aggregating  at  that  time  $180,926,700,  were  owned  by  7,688  cor- 
porations and  private  individuals  ;  4,239  of  these  holders  received  their  interest 
in  New  York  city,  1,611  in  Boston,  1,306  in  Philadelphia,  243  in  Baltimore,  42 
in  Chicago,  54  in  Cincinnati,  169  in  Washington,  10  in  St.  Louis,  and  9  in  New 
Orleans." 


46 


PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

The  total  amount,  it  will 
be  observed,  is  made  up  of 
the  total  registered  bonds, 
excluding  the  sums  held  by 
foreigners,  and  the  amounts 
deposited  by  the  National 
Banks  as  security  for  their 
notes.  The  number  of 
holders  is  80,802.  Com- 
pare this  number  with  the 
4,404,763  holders  of  the 
French  debt.^ 

Wliat,  now,  i  s  the  manner 
in  which  these  $644,000,000 
of  registered  bonds  are  dis- 
tributed ?  The  accompany- 
ing table  presents  two  sorts 
of  classification.  First,  the 
holders  themselves  are  clas- 
sified according  as  they  are 
male,  female,  or  corporate, 
and  the  amounts  respective- 
ly belonging  to  each  class 
are  designated.  In  the  sec- 
ond place,  there  are  eight 
sub-classifications  according 
to  the  sums  registered  for 
each  class.     For  example, 


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'  It  should,  however,  be  stated 
that  separate  entries  on  the  Gov- 
ernment's books  do  not  necessarily 
mean  separate  holders.  Nor  does 
M.  Leroy-BeauUeu  leave  the  impres- 
sion that  there  are  so  many  holders 
of  the  French  debt.  He  himself  es- 
timates  (p.  543)  from  1,254,040  en- 
tries m  1869  that  the  owners  of  the 
debt  numbered  between  700,000  and 
800,000. 


SOCIAL  TEXDEXCIES  OF  PUBLIC  DEBTS. 


47 


Class  I  includes  all  who  hold  bonds  in  sums  varying  from 
$50  to  $500,  wliile  Class  YIII  embraces  holdings  exceeding 
in  amount  $50,000.  The  several  amounts  for  each  class  may 
be  read  from  the  last  column  of  the  table. 

There  are  two  conclusions  of  unportance  that  spring  from 
the  figures  presented  in  the  above  table.  In  the  first  place, 
whatever  social  influences  flow  from  concentrated  holding 
of  the  public  funds,  must  make  their  appearance  in  the 
United  States,  should  the  present  policy  of  debt-payment  be 
arrested  and  a  system  of  permanent  indebtedness  be  estab- 
lished. The  population  of  this  country  in  1880  was  fifty 
millions ;  the  number  of  individuals  holding  registered  bonds 
was  71,587.  Other  citizens  may  be  interested  in  the  public 
debt  through  their  ownership  of  stock  in  corporations  that 
hold  it ;  but  when  one  remembers  how  corporations  stand 
related  to  the  question  of  social  inequality,  this  fact  can  not 
alleviate  the  harshness  of  the  conclusion  suggested.  But 
again,  if  the  figures  presented  be  even  approximately  cor- 
rect, they  do  not  allow  much  ground  for  the  argument  that  a 
public  debt  should  be  maintained  in  the  interest  of  "  widowj 
and  orphans."  One  frequently  hears  that  a  permanent  debt 
is  a  good  thing  because  it  permits  easy  and  safe  investments 
for  the  funds  of  those  who  are  weak  and  dependent,  but  this 
consideration  is  not  warranted  by  the  figures  presented.  This 
will  appear  in  its  clearest  light  by  a  grouping  of  figures  from 
the  previous  table.  If  we  drop  from  our  notice  the  last  four 
columns,  and  place  the  figures  pertaining  to  the  first  five 
classes  in  contrast  with  those  that  remain,  the  result  will  be 
as  follows : 


CLASSES. 

Number  of 
males 

Amonnts  held 
by  males. 

Number  of 
females. 

Amounts  held 
by  females. 

I  to  V  inclusive. . . . 
VI,  Vll,  VIII 

38,088 
4,174 

$73,416,300 
253,769,200 

27,923 
1,402 

$40,865,000 
49,488,350 

This  presentation  offers  slight  encouragement  to  those 
who  look  upon  public  debts  as  a  means  by  which  a  beneficent 


48 


PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 


government  may  exercise  its  paternal  care.  It  is  true  that 
some  widows  and  orphans  invest  in  the  public  funds,  but 
when  the  respective  amounts  of  large  and  small  holders  are 
placed  in  contrast,  and  when  it  is  noticed  that  out  of  a  total 
of  $664,000,000  of  registered  bonds  $410,000,000  are  held  in 
sums  of  $50,000  and  over,  it  seems  a  little  ludicrous  to  urge 
the  maintenance  of  a  Federal  debt  as  a  measure  of  charity  to 
dependent  persons. 

But  this  matter  of  the  distribution  of  public  indebted- 
ness may  be  regarded  from  another  point  of  view.  So  far 
as  social  results  are  concerned,  the  territorial  holding  of 
public  obligations  is  of  as  much  importance  as  their  per- 
sonal ownership.  For,  in  the  first  place,  this  shows  the 
centers  at  which  wealth  is  concentrated,  since  debt  paper 
will  naturally  flow  to  that  market  where  there  is  free  capital 
to  absorb  it.  This  class  of  facts  also  indicates  those  parts  of 
the  country  which,  on  account  of  some  past  service,  have  a 
recognized  claim  to  annual  payments  from  the  general  pro- 
ceeds of  taxes.  Public  creditors  must  live  from  the  prod- 
uct of  current  industry,  but  they  may  be  so  distributed  over 
the  land  that  the  labor  which  lends  itself  to  their  support  is 
not  the  labor  of  the  locality  in  which  they  live.  It  thus 
appears  that  a  public  debt  may  be  so  distributed  within  a 
country  that  the  people  of  one  section  will  be  bound  in  serv- 
ice to  those  of  another  section.  An  analysis  of  the  holding 
of  the  registered  debt  of  the  United  States  directed  by  this 
thought  is  full  of  interest. 

Analysis  of  Territorial  Distribution  of  Registered  Bonds 
held  hy  private  individuals. 


DISTRICTS. 

Amounts  held. 

Corporations 

excluded. 

Percentage  of 

total  amounts 

held. 

Percentage 

of  total 
population. 

Amounts 

assigned  on  basis 

of  population. 

New  Enj^land  States 

Middle  States 

Southern  States  . . . 
Western  States. .  . . 

$70,972,050 

279,008,250 

13,139,800 

54,418,750 

17 

67 

3 

13 

8 
21 
37 
84 

$33,403,108.00 

87,683,158.50 

1.^4,489,374.50 

141,963,209.00 

Totals 

417  538  850    1         inn 

100 

417,538,850.00 

SOCIAL  TENDENCIES  OF  PUBLIC  DEBTS.  49 

The  source  of  information  for  tlie  above  table  is  the  re- 
port on  public  debts  of  1880,  but  I  have  summarized  the 
facts  there  presented,  so  as  to  bring  to  our  notice  the  four 
well-defined  groups  of  States,  the  territories  and  the  Dis- 
trict of  Columbia  being  grouped  with  the  Western  States. 

This  table  can  not  call  for  much  explanation.  From  the 
figures  of  the  first  column  one  learns  the  amounts  of  bonds 
held  by  the  various'  groups  of  States;  the  second  column 
presents  the  same  fact  in  the  language  of  percentages.  The 
thii'd  column  shows  the  proportion  of  the  total  population 
which  finds  its  residence  in  each  of  the  sections  considered, 
while  the  last  column  declares  what  sums  would  have  been 
held  had  the  total  amount  of  registered  bonds  owned  by 
private  persons  been  assigned  to  the  several  sections  on  the 
basis  of  population.  The  disparity  of  ownership  which  makes 
its  appearance  is  the  most  marked  in  the  case  of  the  Southern 
States.  Here  is  a  section  with  37  per  cent  of  the  popula- 
tion holding  but  3  per  cent  of  the  bonds.  "Were  it  true  that 
Federal  taxation  is  in  proportion  to  population,  the  South 
would  be  called  upon  to  pay  to  citizens  of  the  other  sections 
the  entire  debt  charges  entailed  by  $141,349,574  of  bonds, 
this  beinor  the  difference  between  the  amount  held  and  the 
amount  assigned.  The  Western  States,  also,  are  in  like  man- 
ner subject  to  an  annual  interest  payment  in  favor  of  their 
Eastern  neighbors.  Of  the  separate  States,  the  two  most 
fortunate  in  this  regard  are  Massachusetts  and  ]S"ew  Tork.  In 
Massachusetts  there  are  16,885  holders,  being  23-04  per  cent 
of  the  total  number ;  while  the  amount  held  is  $45,138,750, 
being  6*99  per  cent  of  the  total  amount.  The  population  of 
this  State  is  3-66  per  cent  of  the  total  population.  Corre- 
sponding figures  for  Kew  Tork  show  that  she  presents  14,803 
holders,  being  20*24  per  cent  of  the  total  number ;  and  that 
these  are  proprietors  of  bonds  equal  to  $210,264,250,  which 
is  32-60  per  cent  of  the  entire  sum.  The  population  of  this 
State  is  10*14  per  cent  of  that  of  the  United  States.  In  the 
face  of  such  figures  as  these  it  is  useless  to  deny  the  sectional 
concentration  of  the  bondholding  interest.     It  may  be  that 


50  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

the  relation  thus  disclosed  is  no  more  strongly  marked  than 
appears  in  the  ordinary  course  of  business,  but  there  is  one 
important  distinction  that  should  be  noticed.  In  ordinary 
business,  the  relation  that  exists  between  the  various  sections 
of  a  country  is  service  and  counter-service ;  the  benefit  is 
mutual,  or  the  intercourse  would  not  continue.  In  the  case 
of  bonds,  however,  the  service  by  virtue  of  which  the  pro- 
prietors claim  an  annual  payment  has  been  passed  for  nearly 
a  generation.  It  is  right  that  this  payment  should  be  made, 
but  it  is  also  right  that  those  who  hold  the  claim  should 
make  no  complaint  if  those  citizens  of  the  United  States  who 
are  debtors  insist  upon  extinguishing  the  principal  of  the 
Federal  debt. 

"When  we  notice  the  concentration  of  money  in  and  about 
our  great  cities,  and  that  the  figures  presented  above  are  but 
exponents  of  a  general  fact,  we  can  not  escape  the  feeling 
that  the  public  sentiment  of  cities  is  not  to  be  relied  upon  in 
matters  touching  great  financial  questions.  The  class  interest 
is  too  strong.  One  might  as  well  expect  to  discover  the 
political  sentiment  of  the  public  at  large  by  inquiring  what 
the  citizens  of  Washington  thought  of  any  proposed  measure. 
The  conclusion,  then,  of  the  foregoing  analysis  seems  to  be 
as  follows :  "While  we  may  not  say  that  public  debts  bear 
with  them  a  distinct  and  independent  social  tendency,  it  is 
yet  true  that  they  exert  a  social  influence  in  rendering  per- 
manent such  class  relations  as  spring  from  disparity  of  pos- 
sessions, and  that  they  introduce  conflicting  interests  between 
citizens. 

It  may  not  be  inappropriate  to  add  a  word  respecting  the 
social  tendencies  of  foreign  indebtedness.  The  relation  of 
debtor  and  creditor,  when  established  between  peoples  of  the 
same  industrial  grade,  and  the  same  political  insight  and 
military  strength,  can  not  be  said  to  exert  an  influence  at  all 
different  from  that  which  we  have  previously  considered. 
But  when  peoples  of  altogether  different  degrees  of  indus- 
trial advancement,  different  habits,  different  views  of  life, 
and  different  forms  of  government,  enter  into  this  relation. 


SOCIAL  TENDENCIES  OF  PUBLIC  DEBTS.  51 

it  is  not  at  all  exceptional  for  tlie  inferior  people  to  find 
themselves  delivered  over  to  practical  servitude.  Is  not  this 
what  happened  to  the  Egyptians  ?  Ignorant  of  transactions 
in  money,  they  understood  nothing  of  the  contracts  which 
their  rulers  signed,  and,  since  they  enjoyed  none  of  the  po- 
litical rights  of  free  men,  they  would  have  been  powerless 
to  oppose  such  contracts  had  they  understood  them.  The 
parties  to  this  bargaining  were,  on  the  one  hand,  citizens  of 
a  strong  government  with  money  to  lend ;  on  the  other,  an 
autocratic  ruler  of  an  ignorant  people,  possessed  of  the  sov- 
ereign power  of  taxation.  By  means  of  written  bonds,  the 
money  was  given  to  the  ruler  in  exchange  for  the  power  to 
tax.  The  measure  of  this  servitude  is  found  in  the  annual 
foreign  payments  on  account  of  the  Egyptian  debt,  all  of 
which,  roughly  speaking,  passes  out  of  the  country.  For  the 
year  1882  the  receipts  of  the  Egyptian  Government  were 
$44,800,000 ;  the  annual  debt  charges  for  the  same  year,  in- 
cluding payments  to  the  sinking-fund  and  payments  upon 
preference  bonds,  amounted  to  $25,000,000.  It  may  be  fair 
to  deduct  from  this  amount  the  sum  of  $7,000,000  chargeable 
to  the  earnings  of  property  created  by  the  investment  of  bor- 
rowed capital ;  but  there  would  even  then  remain  an  annual 
payment,  from  the  proceeds  of  taxes,  of  $18,000,000,  passing 
each  year  out  of  the  country.  If  now  we  call  to  mind  the 
number  of  English  officials  in  Egypt,  the  foreign  control 
exercised  over  her  internal  affairs,  and  the  management  of 
her  taxing  machinery  in  the  interest  of  public  creditors,  are 
we  not  justified  in  saying  that  the  days  of  tribute  have  re- 
turned ?  Is  there  not  again  established  between  strong  cred- 
itor and  weak  debtor  states  the  relation  that  formerly  existed 
between  Rome  and  the  barbarian  peoples  ?  It  certainly  seems 
a  little  unjust  to  urge  EngHsh  proprietary  rights  against  peo- 
ple who  are  ignorant  of  the  English  law  of  property.  There 
appears  to  be  such  a  thing  as  an  international  social  question, 
and  one  phase  of  this  question  is  presented  in  connection 
with  international  borrowino^. 


CHAPTEE  lY. 

INDUSTEIAIi   EFFECTS   OF   PUBLIC   BOKKOWHSTG. 

It  is  because  a  public  treasury  can  be  filled  only  out  of^ 
tbe  product  of  current  industry  that  a  study  of  the  industrial 
effects  of  public  borrowing  comes  to  be  of  importance.  For, 
if  governments  borrow  in  such  a  manner  or  to  such  a  degree, 
or  so  correlate  their  borrowing  and  taxing,  that  industry  is 
thereby  discouraged,  the  source  of  all  revenue  will  be  dried 
up.  Sound  rules  of  treasury  management  rest  upon  a  clear 
analysis  of  industrial  relations. 

The  question  thus  brought  to  our  attention  is  perhaps  the 
most  difficult  of  any  of  the  technical  questions  we  shall  have 
to  consider,  and  I  can  only  add  that  it  is  fundamental  to  a 
proper  understanding  of  the  entire  subject.  It  may  also  be 
pertinently  remarked  that  this  subject  offers  certain  peculiar 
temptations  to  the  student.  Many  writers  who  consider  it 
show  great  carelessness  in  tracing  causal  relations.  A  panic 
follows  the  creation  of  a  debt,  a  panic  follows  the  payment 
of  a  debt ;  in  either  case  some  wise  man  will  surely  appear 
to  charge  the  commercial  disaster  upon  the  financial  policy 
of  the  government.  It  is  a  safe  rule,  and  one  that  I  shall 
endeavor  to  keep  in  mind  throughout  this  analysis,  to  deny  a 
causal  relation  which  can  not  be  traced  with  some  degree  of 
clearness. 

Again,  the  natural  desire  for  simplicity  and  uniformity 
of  statement  has  led  to  many  an  abuse  of  good  financial 
maxims.  The  first  lesson  in  practical  finance  is  that  circum- 
stances alter  cases.     In  tracing  the  industrial  effect  of  loans, 


INDUSTRIAL   EFFECTS  OF  PUBLIC  BORROWING.  53 

much  depends  upjQjj  the  purpose  for  which  money  was  bor- 
rowed ;  upon  the  nature  of  the  transaction ;  upon  the  indus- 
trial condition  of  the  people  who  bear  the  loan  ;  upon  social 
relations  as  indicated  by  the  distribution  of  property  among 
the  people ;  upon  the  varying  sums  in  which  the  loan  is  held, 
and  the  comparative  numbers  that  become  creditors  of  the 
state,  as  also  upon  other  conditions  that  will  readily  suggest 
themselves  to  the  reader.  Nor  are  loans  themselves  homo- 
geneous, but  vary  in  character  as  do  the  circumstances  under 
which  they  are  issued.  Our  conclusions,  therefore,  respect- 
ing the  industrial  effects  of  public  borrowing  must  be  hypo- 
thetical rather  than  general,  and  particular  rather  than  uni- 
versal. We  can  not  expect  to  discover  any  grand  principle 
by  which  financiering  may  be  reduced  to  rule,  but  we  may 
hope  to  become  more  perfectly  acquainted  with  the  nature 
of  deficit  financiering  and  to  formulate  certain  maxims  which 
will  be  of  assistance  in  the  practical  administration  of  treas- 
ury affairs. 

The  first  distinction  which  it  is  necessary  to  notice  is  one 
that  exists  in  the  nature  of  loans  themselves.  Does  the 
placement  of  debt  effect  a  movement  in  the  capital  of  the 
country,  or  is  it  followed  merely  by  an  adjustment  of  credits  ? 
This  distinction  between  a  transaction  in  capital  and  a  trans- 
action in  credit  is  not  difficult  to  understand.  The  most 
simple  conception  of  capital  is  that  of  a  fund  for  the  sub- 
sistence of  labor.  It  means  food,  clothing,  shelter.  It  means 
those  things  in  the  enjoyment  of  which  the  laborer  must  be 
guaranteed,  before  his  skill  and  strength  may  be  drawn  from 
producing  them  directly  for  himself  to  other  purposes.  But 
this  guarantee  being  established,  by  the  creation  within  the 
country  of  a  large  subsistence  fund,  whoever  controls  this 
fund  has  it  in  his  power  to  direct  labor,  and  from  this  it 
follows  that  any  disturbance  in  the  ordinary  application  of 
capital  must  effect  a  corresponding  readjustment  in  the  ap- 
plication of  labor.  Public  borrowing  then  comes  to  be  a 
transaction  in  capital  when,  by  means  of  it,  the  government 
gains  control  over  a  definite  portion  of  the  country's  labor. 


54  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

Its  influence  upon  industries  must,  in  such  a  case,  be  direct 
and  immediate. 

But  it  is  possible  for  a  government  to  borrow  money  in 
such  a  manner,  and  to  use  it  in  such  a  way,  that  the  industries 
of  the  country  are  not  in  the  least  affected.  This  is  the  case 
when  a  debt  already  existing  is  paid  with  the  proceeds  of  a 
new  debt,  or  when  floating  indebtedness  is  taken  up  by  the 
issue  of  bonds,  or  when  an  account  is  settled  between  two 
countries.  The  full  meaning  of  transactions  of  this  sort  is 
that  credits  of  one  kind  are  given  up  in  exchange  for  credits 
of  another.  The  industries  of  a  country  are  not  directly  in- 
fluenced by  such  a  transaction,  for  it  brings  no  actual  capital 
under  the  control  of  the  government,  and  consequently  oc- 
casions no  readjustment  in  the  application  of  labor. 

But,  it  may  be  asked,  is  this  distinction  ever  disregarded  ? 
It  is  of  course  not  denied  when  thus  brought  clearly  to  view, 
but  there  are  many  indications  that  it  is  not  at  all  times  held 
firmly  in  mind.  The  prevalent  disinclination  of  the  part  of 
cities  to  fund  their  floating  obligations  is  traceable  to  con- 
fusion in  the  public  mind  on  this  point.  The  expressions  of 
admiration  and  wonder  occasioned  by  the  ease  with  which 
France  paid  the  German  indemnity,  also,  spring  from  an  in- 
adequate analysis  of  the  nature  of  the  transaction.  But  so 
pertinent  is  this  operation  as  illustrating  a  transaction  in  cred- 
it, and  so  interesting  in  itself,  when  we  consider  that  it  was 
the  largest  amount  of  money  ever  borrowed  at  one  time,  that 
I  venture  to  present  at  length  the  manner  in  which  it  was 
carried  through. 

According  to  oflicial  figures,  the  entire  expense  of  the 
Franco- Prussian  war  was  11,471,000,000  francs.  This  occa- 
sioned the  creation  of  a  debt  of  9,890,000,000  francs.  Of 
this  sum,  5,800,000,000  francs  was  paid  to  Germany  as  a 
war  indemnity,  and  it  is  the  borrowing  of  this  sum  which 
serves  as  an  illustration  of  a  transactron  in  credit. 

In  1871,  on  the  basis  of  a  law  of  June  20,  the  Minister 
of  Finance  issued  a  call  for  a  loan  of  2,000,000,000  francs. 
The  proceeds  of  this  loan  were  2,250,000,000,  which,  added  to 


INDUSTRIAL  EFFECTS  OF  PUBLIC  BORROWING.  55 

a  loan  of  750,000,000  of  tlie  year  before,  made  3,000,000,000 
taken  bv  the  government  in  two  years.  In  less  than  thirteen 
months  thereafter,  by  a  law  of  July  15,  1873,  the  treasury 
authorities  were  permitted  to  place  another  and  yet  larger 
loan.  This  is  what  is  known  as  the  three-milliard  loan,  the 
actual  proceeds  of  which  were  3,498,000,000  francs.  This 
loan,  which  was  placed  by  popular  subscription,  called  for  ten 
per  cent  of  the  amount  subscribed  as  a  guarantee,  and  per- 
mitted the  remainder  to  be  paid  in  nineteen  installments, 
but  required  that  the  last  installment  should  be  paid  before 
April  14, 1874.  The  loan  took  the  form  of  perpetual  rentes, 
and  bore  interest  at  the  rate  of  5  per  cent. 

Let  us  now  consider  the  character  of  the  subscriptions. 
In  Paris  there  were  found  34,324  subscribers,  whose  united 
subscription  amounted  to  13,252,455,390  francs.  In  France, 
outside  of  Paris,  the  subscribers  numbered  792,340,  whose 
bids  amounted  to  4,513,455,566  francs.  Besides  these,  there 
were  107,612  offers  from  foreign  countries,  amounting  to- 
gether to  26,050,195,054  francs.^  That  is  to  say,  there  were 
924,276  individuals  and  associations,  whose  united  subscrip- 
tions amounted  to  43,816,096,010  francs,  willing  to  lend 
money  to  the  French  government.  This  is  a  sum  equal  to 
$8,765,219,202  which  was  placed  at  the  disposal  of  the  gov- 
ernment in  response  to  a  request  for  a  loan  of  $600,000,000. 

Kow,  exclaims  the  world,  what  a  wonderful  country  is 
France !  What  masterly  men  must  be  her  financiers !  What 
strength  is  displayed  by  her  industries  in  thus  furnishing 
so  large  a  sum  for  the  payment  of  Germany !  Without 
denying  tlie  conclusion  as  to  the  greatness  of  France  or 
her  financiers,  the  payment  of  the  five  milliards  can  not  be 

1  This  sum  estimated  in  rentes  amounted  to  1,541,431,660  francs,  the  subscrip- 
tions being  distributed  among  the  various  nations  as  follows:  Germany,  471,- 
154,815  francs;  Belgium,  396,044,320  francs;  England,  334,151,215  francs; 
'Alsace-Lorraine,  87,735,015  francs  ;  Holland,  82,986,865  francs  ;  Denmark,  34,- 
402,390  francs;  Turkey,  32,917,790  francs;  Switzerland,  32,481,285  francs; 
Italy,  31,078,090  francs;  Austria,  30,370,440  francs;  Roumanian  States,  5,792/ 
765  francs  ;  Asia,  2,314,670  francs. 


56  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

accepted  as  proof  of  industrial  strength,  for  the  fact  is  that 
French  industries  did  not  supply  the  funds.  It  is  true  that 
for  Germany  so  large  a  sum  of  money  resulted  in  an  increased 
control  over  capital,  yet  the  payment  of  this  sum  by  France 
did  not  immediately  entail  upon  her  an  equivalent  loss.  The 
full  effect  of  this  payment  was  a  re-adjustment  of  credit  rela- 
tions between  the  French  and  foreign  peoples.  It  was  a 
transaction  in  credits.  There  is  in  Europe  a  system  of  inter- 
national payments  of  which  we  know  little  or  nothing  in  this 
country.  If,  for  example,  a  merchant  in  Paris  wishes  to 
make  a  payment  in  Berlin,  it  is  quite  customary  for  him  to 
send  securities  of  some  sort  to  his  Berlin  agent,  which,  being 
sold,  permits  him  to  place  so  much  of  their  proceeds  as  are 
necessary  to  the  order  of  his  creditor.  The  securities  thus 
used  are  known  as  "  international  values."  They  may  be  the 
bonds  of  any  reliable  state  whose  paper  can  not  be  retained 
among  its  own  citizens.  Thus  the  bonds  of  Italy,  Spain, 
Turkey,  and  Russia  are  so  used.  Eailroad  securities,  as  also 
the  paper  of  other  well-established  industrial  corporations, 
swell  the  total  of  "  international  values."  The  point  of  im- 
portance, however,  is  to  recognize  the  existence  of  such  val- 
ues, and  to  understand  that  l^y  means  of  them  any  special 
stress  upon  one  market  may  be  in  part  transferred  to  other 
money  centers.  These  "  international  values  "  act  as  con- 
necting pipes  between  great  reservoirs  of  capital. 

In  the  presence  of  such  commercial  relations,  how  far  is 
the  placement  of  a  great  loan  felt  in  the  country  where  it  is 
issued  ?  To  answer  this  question,  one  must  remember  that 
the  credit  of  a  strong  state  is  always  higher  at  home  than 
abroad,  and,  on  this  account,  if  a  government  advertise  for 
the  placement  of  a  considerable  loan,  the  home  market  will 
be  cleared  of  foreign  obligations  to  make  room  for  the  do- 
mestic debt.  This  is  exactly  what  occurred  in  the  case  of 
the  great  French  loans.  Those  Frenchmen  who  held  foreign 
paper  sent  it  abroad  in  order  to  secure  the  necessary  funds  for 
the  purchase  of  the  new  rentes.  It  was  not,  then,  France 
that  furnished  the  ready  cash  for  paying  the  fine  of  five  mil- 


INDUSTRIAL  EFFECTS  OF  PUBLIC    BORROWING.  57 

liards,  but  Berlin,  London,  Rome — indeed,  the  world  at  large 
came  to  her  assistance.  And,  since  the  loan  did  not  result 
in  the  absorption  of  domestic  capital,  French  industries  were, 
for  the  time  being,  outside  its  range  of  influence ;  its  full 
immediate  effect  was  registered  in  the  changed  credits  which 
Frenchmen  held.  The  transaction,  in  short,  amounted  to 
this :  that  France  drew  bills  of  exchange  upon  her  many 
foreign  debtors  in  favor  of  Germany.  This,  of  course,  was 
only  possible  because  France  had  accumulated  credits  abroad 
by  means  of  her  foreign  commerce,  which  were  given  up  in 
return  for  French  rentes.  It  appears,  therefore,  that  the 
transaction  was  of  the  nature  of  an  international  refunding 
operation,  and  had  nothing  to  do  with  capital  invested  in 
current  industry.  French  exports  and  imports  were  not 
greatly  influenced,  labor  was  not  diverted  from  its  natural 
channels,  and  all  domestic  trade  for  the  time  went  on  very 
much  as  though  no  debt  had  been  contracted.  That  which 
challenges  our  astonishment  is  the  extent  to  which  interna- 
tional credits  have  been  developed,  and  not  the  fact  that 
France  was  able  to  raise  the  money  to  pay  her  fine.* 

There  seems,  then,  a  clear  difference  between  a  financial 
operation  which  touches  capital  and  one  which  merely  results 
in  a  re-adjustment  of  existing  credits,  and  it  is  needless  to 
remark  that  our  further  study  has  to  do  ■svith  such  borrowing 
as  exerts  a  direct  influence  upon  existing  industries.  The 
foregoing  analysis  discloses  also  a  fact  of  much  importance 
in  the  prosecution  of  this  study.  Since  it  is  through  the 
medium  of  capital  that  public  borrowing  comes  into  contact 
with  industries,  it  follows  that  the  industrial  effects  of  bor- 
rowing will  vary  according  to  the  fund  of  capital  moved  by 

'  There  is  a  report  upon  the  payment  of  the  German  indemnity  by  M.  Leon 
Say,  made  in  18Y5,  in  which  the  movements  of  international  credits,  previous 
to  the  great  loans,  are  traced.  This  subject  is  also  treated  at  some  length  by 
Leroy-Beaulieu,  "  Traite  de  la  Science  des  Finances,"  vol.  ii,  pp.  218-227. 
Compare  also  "Blackwood's  Magazine,"  vol.  cxvil,  p.  172,  for  the  terms  of  the 
contracts,  and  the  details  of  payment.  Especial  attention  is  called  to  the 
ease  in  which  this  payment  was  made  without  materially  affecting  international 
exchanges. 


68  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

the  placement  of  a  loan.  It  may  be  difficult  to  trace  with 
exactness  the  source  from  which  the  government  draws  its 
capital ;  but  the  more  perfectly  this  may  be  done  the  more 
accurate  will  be  the  judgments  of  the  financier.  But  in  some 
cases  this  task  is  not  a  difiicult  one.  Thus  it  is  easy  to  dis- 
cern if  a  loan  absorbs  foreign  or  domestic  capital,  and  but  a 
slight  consideration  leads  one  to  see  that  the  industrial  effects 
of  borrowing  are  quite  different,  according  as  the  funds  are 
supplied  at  home  or  abroad. 

At  the  outbreak  of  a  severe  war  there  are  certain  advan- 
tages in  placing  a  foreign  rather  than  a  domestic  loan,  for  in 
this  manner  the  unnatural  strain  to  which  a  people  are  sub- 
jected, in  passing  from  a  condition  of  ])eace  to  that  of  war, 
is  taken  from  domestic  industries.  Any  arbitrary  change  in 
established  business  habits  or  methods  is  always  attended 
with  injurious  consequences,  and  it  should  be  the  purpose  of 
the  financier,  who  controls  that  part  of  government  ma- 
chinery most  intimately  connected  with  business  life,  to 
effect  all  necessary  changes  with  the  least  possible  industrial 
disturbance.  A  foreign  loan  readily  lends  its  influence  to 
this  purpose.  The  proceeds  of  such  a  loan  do  not  find  their 
way  into  the  borrowing  country  as  money ;  at  least,  this  will 
not  occur  in  any  such  manner  as  to  effect  an  inflation  of  the 
circulating  medium.  It  is  not  money  that  the  government 
wants ;  its  demands  are  either  for  the  products  of  labor,  or 
for  those  things  by  the  possession  of  which  it  may  gain  con- 
trol over  labor.  It  is  probable,  also,  that  an  emergency  so 
great  as  to  justify  foreign  loans  would  result  in  the  estab- 
lishment of  such  commercial  relations  that  foreign  exchanges 
would  He  against  the  borrowing  country;  and,  in  such  a 
case,  the  country  can  only  maintain  the  normal  amount  of 
circulating  medium  through  the  exportation  of  credits.  The 
imported  commodities  would  be  paid  for  by  exported  bonds 
and,  for  a  time  at  least,  a  country  might  secure  its  supplies 
without  influencing  to  any  great  degree  domestic  prices. 
"While  the  country  is  in  a  state  of  transition  from  peace  to 
war,  this  is  a  consideration  of  no  slight  impoi'tance. 


INDUSTRUL  EFFECTS  OF  PUBLIC  BORROWING.  69 

This  advantage  of  foreign  loans  appears  more  clearly  if 
we  notice  what  kind  of  goods  ^will  probably  be  imported. 
Thus  the  loan  may  be  paid  in  goods  that  can  be  directly  used 
for  belligerent  purposes — as  arms,  military  equipments,  and 
the  like.  This  simply  means  that  the  government  employs 
foreign  labor  to  supply  its  wants,  and  induces  foreign  capi- 
talists to  foot  the  bills  ;  and,  if  the  enterprise  undertaken 
by  the  state  draw  large  numbers  of  men  from  ordinary  pur- 
suits, the  fact  that  they  are  supported  by  foreign  labor  will 
relieve  domestic  industries  of  this  charge.  But  the  relief 
thus  experienced  will  be  as  great,  though  perhaps  not  as 
direct,  if  goods  of  ordinary  consumption  are  purchased  by 
the  proceeds  of  bonds.  The  nature  of  the  question  is  the 
same  in  either  case.  Goods  of  ordinary  consumption  may 
fail  in  their  supply  because  the  government  has  diverted 
labor  from  its  accustomed  lines  of  activity.  Industrial  dis- 
turbance is  inevitable  when  a  people  undertake  belligerent 
operations,  and  the  question  to  be  decided  is,  whether  the 
labor  remaining  in  ordinary  occupations  shall  be  re-distributed, 
thus  intensifying  the  industrial  disturbance,  or  whether  the 
country  shall  for  a  time  relieve  itself  by  employing  foreign 
labor,  and  thereby  run  in  debt.  In  case  the  latter  alterna- 
tive is  adopted,  no  excessive  burden  is  thrown  upon  domestic 
industries,  the  community  is  conscious  of  no  want,  and  prices 
are  uninfluenced  by  the  financial  policy  of  the  government. 

This  interpretation  of  the  relation  between  foreign  bor- 
rowing and  domestic  industries  is  fully  borne  out  by  refer- 
ence to  the  table  of  trade  statistics  for  the  United  States 
during  the  period  of  the  late  civil  war,  presented  on  the  fol- 
lowing page. 

For  our  present  purpose  it  is  right  to  regard  the  exporta- 
tion of  gold  in  the  same  light  as  the  creation  of  a  foreign 
debt.  This  is  true  because  it  was  made  possible  to  spare 
so  much  gold  from  circulation  by  the  fact  that  part  of 
the  public  debt  was  so  shaped  as  to  serve  the  purposes  of  do- 
mestic money.  The  commercial  results  were  the  same  as 
though  bonds  to  an  equal  amount  had  been  placed  on  the 


60 


rUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 


Table  shoioing  the  Excess  of  Edcports  and  Imports,  and  the 
Excess  of  Exports  of  Bidlion  over  Imports  of  I^ullion, 
in  the  United  States  frojn  1861  to  1868} 


Excess 
of  exports 

Excess 
of  imports. 

Excess  of  bullion  ex- 
ports over  bullion 
imports. 

1861 

$69,756,000 

1862 

$1,313,824 

$20,472,000 
54,572,000 

1863 

39,371,000 

157,609,000 

72,716,000 

85,952,000 

101,254,000 

1864 

92,280,000 

1865 

57,833,000 
75,343,000 

1866 

1867 

38,797,000 

foreign  market  and  the  gold  retained  in  circulation.  It  ap- 
pears, therefore,  that  the  full  extent  of  assistance  rendered 
bj  foreign  peoples  to  this  government,  for  which  a  debt  was 
created,  is  measured  by  the  gold  exports  added  to  the  excess 
of  values  imported.  It  has  since  been  necessary  for  the 
United  States,  in  order  to  bring  home  her  bonds  placed 
abroad,  as  also  to  again  gain  possession  of  her  portion  of  the 
world's  gold,  to  give  back  capital  equal  to  that  received 
during  the  war.  This  was  accomplished  by  causing  her  ex- 
ports to  exceed  her  imports. 

The  practical  conclusion,  then,  respecting  foreign  loans, 
seems  to  be  that  if  a  government  desires  to  maintain  the  in- 
dustries of  the  country  in  statu  quo,  while  at  the  same  time 
steps  are  taken  which  tend  to  disturb  existing  industrial  re- 
lations, it  must  see  to  it  that  the  proceeds  of  its  loans  are 
brought  from  abroad.  One  must  not,  however,  on  this  ac- 
count, assume  that  public  loans  should  always  be  placed  on  a 
foreign  market,  or  that  a  government  should  never  so  con- 
dition its  bonds  as  to  absorb  domestic  capital.  It  may  be 
wise  to  break  up,  for  the  time  being,  the  usual  course  of  in- 
dustries. The  exigencies  of  the  case  may  require  that  home 
labor  should  be  induced  to  exert  an  energy  greater  than  it 
normally  exerts ;  for  such  a  purpose,  if  borrowing  be  resorted 
to  at  all,  it  is  home  borrowing  that  commends  itself  to  the 

'  Nimmo's  "Report  on  Commerce  and  Navigation,"  1882,  pp.  Ivi,  Ivii. 


INDUSTRIAL  EFFECTS  OF  PUBLIC  BORROWING.  61 

financier.  But,  understanding  the  natural  working  of  foreign 
loans,  it  must  be  left  to  the  peculiar  conditions  of  each  case 
to  determine  when  they  shall  be  used. 

We  enter  upon  a  more  difficult  part  of  our  task  when  we 
undertake  to  trace  the  industrial  effects  of  domestic  loans. 
No  great  reliance  can  be  placed  upon  personal  experience 
with  commercial  credits  in  judging  of  public  loans,  for  cer- 
tain essential  differences  exist  between  the  state  and  a  private 
person  as  borrowers  of  money.  The  credit  of  a  state  is 
based  on  sovereignty,  that  of  an  individual  rests  on  some  ma- 
terial guarantee,  or  on  known  personal  traits  of  the  borrower. 
Governments  can  not  tell  when  an  extraordinary  demand  for 
money  may  be  arrested ;  the  demand  of  individuals  is 
strictly  limited.  The  debt  of  a  state  is  supported  by  taxes ; 
that  of  individuals  or  private  corporations  may  be  paid  out 
of  profits  which  spring  from  the  investment  of  the  proceeds 
of  the  loan.  It  is  true  the  proceeds  of  a  public  debt  may,  in 
like  manner,  be  profitably  invested,  yet  in  such  a  case  com- 
mercial rules  do  not  usually  apply  to  government  industries. 
But  the  greatest  difficulty  in  tracing  the  industrial  effects  of 
public  borrowing  springs  from  the  fact  that  these  effects  are 
not  constant,  but  vary  with  each  new  step  taken  in  the  de- 
velopment of  the  loan  policy. 

When  a  government  undertakes  to  meet  a  long-continued 
demand  by  the  use  of  credits,  every  loan  contracted  changes 
the  conditions  for  every  succeeding  loan,  so  that  what  is  ob- 
served to  be  the  effect  of  the  first  can  not  be  accepted  as 
a  sure  indication  of  what  will  result  from  the  second  or  fol- 
lowing loans. 

Between  the  inception  of  a  loan  policy  as  set  on  foot  at 
the  beginning  of  a  war,  and  its  final  collapse  with  the  fall  of 
public  credit,  there  are  three  distinct  steps  which  it  is  possible 
for  a  government  to  take.  These  steps  are  arbitrarily  marked, 
according  as  the  rate  of  interest  paid  is  normal,  high,  or  ex- 
cessive. But  though  arbitrary  in  their  presentation,  the  in- 
dustrial results  observed  are  clearly  defined.  The  reason  is 
that  different  funds  of  capital  are  moved  according  to  the 


62  PUBLIC  BORROWING  iS  A  FINANCIAL  POLICY. 

different  strength  of  the  motives  offered  by  the  government 
to  secure  money.  Let  us  then  seek  to  trace  the  industrial 
effects  of  the  loan  policy,  first,  when  money  may  be  se- 
cured by  offering  normal  rates  of  interest ;  second,  when 
unusual  rates  must  be  offered  to  secure  the  requisite  funds; 
and  third,  when  the  government  finds  it  necessary  to  give 
excessive  rates  of  interest. 

Loans  secured  at  normal  rates  for  money. 

A  public  loan  which  offers  only  the  normal  rate  of  inter- 
est can  not  exert  any  decided  influence  upon  established  in- 
dustries, for  there  is  no  motive  presented  to  one  whose  capital 
is  well  invested  to  withdraw  any  part  of  it  from  its  accus- 
tomed employment  and  place  it  at  the  disposal  of  the  state. 
It  follows  then,  that  industries  engaged  in  profitable  employ- 
ment at  the  time  of  the  placement  of  the  loan  will  continue 
to  exercise  their  accustomed  degree  of  activity,  and  to  main- 
tain the  usual  relations  between  capital  employed  and  labor 
directed.  This  must  be  admitted  when  we  recognize  the 
source  from  which  such  a  loan  wiU  be  filled.  The  only  fund 
that  can  be  influenced  by  the  offer  of  usual  inducements  is 
that  which  is  on  the  lookout  for  investments.  This  is  what 
is  technically  known  as  the  fund  of  capital  entirely  free. 
Employed  capital  will  not  be  placed  at  the  disposal  of  the 
state.  The  government  can  make  no  use  of  fixed  invest- 
ments, while  the  proprietor  of  such  investments  can  not  spare 
the  circulating  capital  needed  to  keep  them  in  a  profitable 
state  of  activity.  There  is  no  inducement  offered  to  one  so 
situated  to  subscribe  to  a  public  loan,  and  consequently  there 
is  no  danger  that  a  loan  which  pays  only  normal  returns 
on  money  will  cripple  established  industries.  If  filled  at  all, 
it  will  be  filled  from  that  fund  of  free  capital  which  would 
otherwise  have  been  invested  in  new  industries.  Its  full 
effect  is  to  check  further  industrial  expansion,  and  this  it 
does  by  turning  the  energy  of  the  country  into  other  channels 
In  case,  then,  of  a  sudden  emergency  calling  for  increased 
public  revenue,  there  is  much  to  be  said  in  favor  of  resorting 


INDUSTRIAL  EFFECTS  OF  PUBLIC  BORROWIIJG.  63 

to  loans,  provided  the  loans  may  be  placed  at  reasonable 
rates. 

It  is  sometimes  said  in  tliis  connection  that  the  placement 
of  a  loan  induces  men  to  save,  and  for  this  reason  public  bor- 
rowing is  not  altogether  an  evil.  It  may  be  there  ai'e  some 
people  who  have  such  confidence  in  government  bonds,  and 
such  fear  of  private  securities,  that  they  will  buy  a  bond  with 
greater  pleasure  than  invest  in  common  stocks.  This  is  trae 
of  the  French  and  possibly  of  the  Germans ;  but  the  consider- 
ation is  of  slight  importance  for  England  or  for  the  United 
States.  Those  conditions  which  lead  men  to  private  saving 
are  not  changed  by  the  offer  of  public  bonds  at  normal  rates 
of  interest,  and  it  is  doubtful  if  such  a  result  may  be  relied 
upon  in  countries  where  private  credits  are  well  developed. 

Another  popular  conception  is  forced  upon  our  attention 
at  this  point.  It  is  quite  generally  assumed  that  a  demand 
for  capital  by  the  state  tends  to  raise  the  rate  of  current 
interest,  and  that  this  rise  is  due  to  competition  between  the 
government  and  business  men  for  control  over  the  country's 
fund  of  free  capital.  The  demand  of  the  state,  it  is  claimed, 
is  in  addition  to  the  ordinary  demand,  and  this  is  why  the 
price  of  capital  rises  when  a  representative  of  the  state  appears 
on  the  market.  The  completeness  of  this  explanation  may  be 
doubted,  and  its  truth  also,  unless  its  statement  be  very  care- 
fully guarded.  Other  causes  may  be  mentioned  for  the  rise 
of  interest  which  frequently  follows  the  placement  of  public 
bonds.  The  stability  of  a  government  is  likely  to  be  the 
most  seriously  questioned  just  at  the  time  of  its  greatest  finan- 
cial necessities,  and  on  this  account  investors  will  demand 
a  little  extra  payment  by  way  of  insurance.  Every  person, 
also,  who  has  had  extended  dealings  in  money,  contracts  a 
habit  of  thought  which  naturally  controls  his  investments. 
It  is  like  starting  a  wagon  out  of  a  rut  to  bring  him  to  think 
of  lending  to  the  government,  and  for  this  reason  the  govern- 
ment may  find  it  necessary  to  increase  slightly  its  offers. 
These  considerations  tend  to  affect  the  rate  of  interest  on 
government  paper. 


64  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

But  liow  does  the  matter  stand  with  this  "  extra  demand  " 
for  capital?  There  has  been  a  vast  amount  of  loose  reason- 
ing upon  this  point.  The  essential  distinction  between  the 
state  and  the  individual  has  not  been  kept  clearly  in  mind. 
The  fact  is  that  the  government  desires  capital  for  the  pur- 
pose of  maintaining  and  directing  labor,  and  no  more  capital 
is  required  to  supply  the  total  labor  of  the  country  with  the 
necessary  means  of  subsistence  when  directed  by  the  state, 
than  when  under  private  or  coq^orate  control.  Whence, 
then,  arises  any  extra  demand  ?  How  does  this  competition 
come  about  which  is  said  to  raise  the  rate  of  interest  ?  "We 
must  surely  go  deeper  into  the  analysis  than  to  refer  thus 
loosely  to  the  law  of  supply  and  demand. 

This  slight  rise  in  the  rate  of  interest  which  follows  upon 
the  placement  of  a  public  loan,  so  far  as  not  already  accounted 
for,  linds  its  final  explanation  in  the  peculiar  nature  of  profit 
and  interest,  and  the  relation  in  which  they  stand  to  each 
other.  The  most  simple  conception  of  interest  is  that  it  is 
payment  for  the  hire  of  capital ;  while  profit,  on  the  other 
hand,  is  self-payment  for  the  management  of  capital.  It 
does  not  then  necessarily  follow  that  the  rate  of  profit  and 
interest  fluctuate  together,  for  they  are  not  dependent  upon 
the  same  antecedent  conditions.  Our  attention  was  above 
drawn  to  the  fact  that,  in  contracting  a  loan,  a  government 
may  be  obliged  to  pay  something  above  the  market  rate,  on 
account  of  the  prejudice  which  capitalists  quite  generally 
feel  against  breaking  their  accustomed  course  of  investments. 
This  prejudice  affects  the  choice  of  men  as  capital  owners. 
But  there  is  another  influence  closely  allied  to  this,  working 
in  the  same  direction,  which  appeals  especially  to  that  class 
of  industrial  agents  known  as  undertakers.  It  is  the  mem- 
bers of  this  class  who  pay  themselves,  in  the  form  of  profits, 
for  their  personal  oversight  in  the  management  of  capital. 
But  the  rate  of  this  payment  varies  with  the  amount  of 
capital  controlled,  and  on  this  account  there  is,  among  suc- 
cessful business  men,  a  constant  desire  to  enlarge  their  busi- 
ness.    It  is  also  true  that  the  possible  extension  of  established 


INDUSTRIAL  EFFECTS  OF  PUBLIC  BORROWING.  65 

business  is  limited  by  the  amount  of  capital  iu  the  country's 
free  fund.  Here,  then,  arises  a  conflict  of  interests  between 
the  business  men  and  the  government,  which  has  a  tendency 
to  raise  the  rate  of  public  interest.  The  state  desires  to  gain 
control  over  the  fund  of  free  capital ;  the  undertakers  desire 
to  accomplish  the  same  purpose,  for  otherwise  it  will  be  im- 
possible for  them  to  extend  their  own  self-employment  by 
which  alone  their  self-pay  may  be  increased.  If  the  state 
insists  on  getting  the  money,  it  must  in  some  manner  induce 
the  managers  of  capital  to  forego  their  prospects  of  increased 
self-remuneration,  and,  if  no  other  argument  can  be  brought 
to  bear,  the  government  will  be  under  the  necessity  of  in- 
creasing slightly  the  rate  of  interest. 

Let  us  now  come  back  to  the  question  from  which  we 
started.  "Will  the  placement  of  a  loan  by  the  state,  which 
does  not  extend  beyond  the  absorption  of  the  country's  fund 
of  free  capital,  tend  to  raise  the  rate  of  interest  through 
comjietition  for  capital  ?  Again  it  must  be  said  that  one's 
conclusions  in  this  study  are  hypothetical.  If  the  conditions 
of  the  country  at  the  time  a  loan  is  made  are  such  as  to 
encourage  an  extension  of  private  enterprise,  then  the  loan 
will  be  felt  in  the  rate  paid  for  money.  But  if  the  state  of 
the  market  is  such  as  to  depress  business  hopes,  to  render  cal- 
culations uncertain,  and  to  discourage  rather  than  encourage 
industrial  managers  (facts  which  usually  present  themselves 
at  the  outbreak  of  a  war,  before  belligerent  conditions  are 
fully  established),  undertakers  will  be  fully  satisfied  to  main- 
tain established  conditions.  This  being  the  case,  they  will  not 
compete  with  the  government  in  the  placement  of  its  loan. 
During  this  period  of  business  uncertainty,  then,  if  the  gov- 
ernment has  a  strong  and  decided  political  policy,  it  can  assume 
control  of  the  country's  fund  of  free  capital  and  yet  exert 
no  influence  upon  the  market  quotations  for  money.  But, 
however  this  may  prove  to  be,  the  conclusion  already  stated 
calls  for  no  modification.  The  effect  of  a  loan  that  extends 
no  further  than  to  draw  to  the  disposal  of  the  state  the  fund 
of  free  capital  in  the  country,  does  not  tend  to  disturb  exist- 


66  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

ing  industrial  conditions.     Its  influence  is  prospective;  it 
tends  only  to  clieck  normal  development. 

Loans  secured  at  high  rates  of  interest. 

Suppose  now  that  the  government,  being  in  want  of 
more  capital  than  can  be  secured  by  an  offer  of  normal  in- 
ducements, determines  to  raise  the  rate  of  interest,  or,  what 
amounts  to  the  same  thing,  to  sell  its  paper  below  par.  In 
so  doing,  it  takes  what  may  be  termed  the  second  step  in 
the  development  of  the  loan  policy.  How  do  the  industrial 
consequences  of  such  a  procedure  differ  from  those  already 
portrayed  ?  The  unusual  inducements  will,  in  all  probability, 
lead  men  to  respond  to  the  appeal  of  the  government,  thus 
giving  over  to  the  service  of  the  state  capital  properly  re- 
garded as  lying  outside  the  free  fund.  The  effect  of  such 
borrowing  can  only  be  determined  when  it  is  learned  from 
what  source  this  newly  presented  capital  is  drawn. 

There  are  three  sources  from  which  the  state  may  hope 
to  secure  funds,  over  and  above  those  susceptible  to  an  offer 
of  normal  inducements.  Thus,  in  the  first  place,  the  govern- 
ment may  expect  something  as  the  result  of  savings  in  per- 
sonal expenditure,  and  here  for  the  first  time  is  it  possible 
to  trace  a  direct  connection  between  public  borrowing  and 
industrial  affairs.  Any  general  movement  of  this  sort  among 
the  people  will  certainly  disturb  the  established  distribution 
of  labor.  For  if  people  cease  to  use  certain  classes  of  com- 
modities, laborers  must  cease  to  produce  them.  Such  a 
change  in  general  demand,  if  sudden  and  extensive,  and  if 
unattended  by  new  demands  for  labor  in  other  lines  of 
activity,  will  lead  to  serious  results.  It  involves  the  tem- 
porary embarrassment  of  those  thrown  out  of  employment, 
which,  in  its  reaction,  will  be  injurious  to  all  industries. 
But  counteracting  influences  will  probably  make  their  ap- 
pearance. 1^0  government  whose  administration  is  under 
the  direction  of  sound  rules  of  finance  would  enter  upon 
this  second  step  of  the  loan  policy,  had  it  not  taken  in  hand 
some  matter  calling  for  men  as  well  as  capital.     The  result. 


INDUSTRIAL  EFFECTS  OF  PUBLIC  BORROWING.  67 

therefore,  of  any  general  saving  in  personal  expenditure 
would  be,  that  those  who  before  had  employed  men  to  serve 
themselves,  would  now  support  an  equal  number  of  men  in 
the  service  of  the  state,  receiving  therefor  from  the  state  a 
promise  of  future  payment.  The  fact  that  the  state  is  will- 
ing to  employ  the  labor  set  free  as  well  as  to  borrow  the 
capital  set  free,  obviates  that  strain  which  otherwise  would 
be  thrown  upon  industries  by  the  sudden  change  in  demand. 
So  far  considered,  then,  this  second  step  in  loan-contracting 
is  followed  by  no  immediate  industrial  consequences  of  a 
serious  nature. 

In  the  second  place,  capital  may  be  secured  through  the 
abandonment  of  certain  industries  which,  before  the  appear- 
ance of  the  state  upon  the  money  market,  were  on  the 
verge  of  paying  no  profit ;  or  from  a  temporary  suspension 
of  certain  industries  which  a  change  in  demand  has  ren- 
dered unprofitable.  It  is  easy  to  understand  the  manner  of 
accomplishing  this,  if  one  but  calls  to  mind  that  industrial 
property  is  always  held  either  in  the  form  of  a  "  plant "  or 
of  subsistence  f und.^  The  former  is  that  which  remains  from 
some  past  investment  of  capital,  as,  for  example,  machinery; 
the  latter  is  free  in  form,  but  applied  in  the  sense  that  it  is 
set  aside  to  maintain  past  investments  in  a  profitable  state  of 
activity.  The  rate  of  return  from  any  enterprise  is  esti- 
mated upon  the  basis  of  these  two  joint  funds,  and,  if  this  is 
observed  to  stand  lower  than  the  common  rate  of  interest  in 
the  community,  there  are  presented  inducements  for  a  change 
of  business.  But  any  change  involves  sacrifice  upon  the 
capital  invested  in  the  plant,  and,  in  consequence,  no  propri- 
etor will  give  up  an  established  business  until  the  hope  of 
increased  return  upon  the  freed  capital  overbalances  the  loss 
from  the  abandonment  of  the  invested  capital.  It  is  possible, 
then,  to  say  that  so  much  of  the  country's  subsistence  fund 
as   is   devoted  to  maintaining  industries  on   the  verge   of 

*  To  render  this  statement  strictly  true,  it  will  be  necessary  to  say  that  it  does 
not  apply  to  land  conceived  as  "  industrial  property." 


68  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

profitless  activity  is  potentially  free ;  and  that  a  slight  rise 
in  the  rate  of  interest  offered  will  give  to  the  government  con- 
trol over  such  capital.  The  details  of  this  operation  are  that  a 
man,  under  the  conditions  assumed,  will  sell  his  buildings  to 
serve  some  other  purpose,  will  sell  his  machinery  for  what  it 
will  bring,  will  sell  the  goods  produced  during  the  last 
period  of  industry,  and  place  the  proceeds  at  the  disposal  of 
the  government.  The  reasoning  is  altogether  the  same  for 
him  who  suspends  an  active  business  until  the  return  of 
"  better  times."  It  may  be  that  he  was  engaged  in  produc- 
ing those  things  which  others  cease  to  consume  when  they 
determine  to  curtail  their  personal  expenditure,  and  he  knows 
that  the  demand  for  his  products  will  return  when  the  occa- 
sion, for  personal  saving  has  passed  away.  He  does  not, 
therefore,  as  in  the  former  case,  dispose  of  his  machinery  and 
buildings  for  what  they  will  bring,  but  simply  closes  the 
doors  and  waits  the  return  of  the  usual  demand.  Mean- 
while, he  invests  the  proceeds  of  the  last  lot  of  goods  pro- 
duced in  public  bonds,  believing  that  the  premium  which 
these  bonds  will  ultimately  pay  will  compensate  his  imme- 
diate loss.  The  labor  which  he  has  been  accustomed  to  em- 
ploy is  likewise  available  for  the  use  of  the  government. 
Such,  then,  is  the  relation  existing  between  industries  and 
public  borrowing,  when  the  capital  secured  is  drawn  from  an 
unprofitable  or  a  suspended  business.  Whether  or  not  such 
financiering  is  defensible,  depends  upon  the  alternatives 
offered  to  the  minister  of  finance. 

The  third  source  from  which  government  loans  may  be 
filled,  when  the  second  step  in  loan-contracting  has  been  en- 
tered upon,  is  created  by  the  increased  intensity  of  industrial 
energy  on  the  part  of  the  paying  industries.  But  what  are 
the  paying  industries  ?  To  understand  this  subject  properly, 
it  is  necessary  to  know  the  order  in  which  economic  wants 
are  developed ;  for  the  permanency  of  wants  is  in  inverse 
order  to  their  development.  Wherever  there  is  a  healthy 
distribution  of  products,  any  general  curtailment  of  personal 
expenditure  will  first  make  its  appearance  in  connection  with 


INDUSTRIAL  EFFECTS   OF   PUBLIC   BOKROWING.  69 

the  so-called  luxuries  of  life.^  Below  these  stand  the  com- 
forts of  life.  In  the  advent  of  a  war  which  results  in  a 
change  in  the  nature  of  the  peace  demand,  it  is  the  industries 
producing  the  luxuries  that  are  obliged  to  suspend  opera- 
tions ;  those  suj)plying  the  necessaries  are  permanent.  More 
than  this  also  is  true.  The  demand  for  common  products 
will  be  increased  by  passing  from  a  condition  of  peace  to  a 
condition  of  war,  for  some  of  those  then  working  for  the 
state  will  be  better  supplied  than  when  in  private  life,  and 
others  will  be  obliged  to  consume  commodities  of  the  more 
common  sort.  Such  industries  then  will  not  only  be  perma- 
nent, but  will  find  motives  for  increased  activity. 

It  is  stated  by  Mr.  Mill  as  a  general  proposition,  that  the 
industry  of  a  people  is  at  any  time  limited  by  the  amount  of 
their  capital.'  This  is  certainly  true.  Capital  is  subsistence 
fund.'  But  Mr.  Mill  is  careful  to  add  that  the  industries  of 
a  country  do  not  always  reach  the  limit  set  by  the  amount 
of  capital  held.  It  is  an  error  to  conceive  of  industry  as  a 
simple  conception ;  it  is,  rather,  to  borrow  an  expression 
from  mathematics,  a  force  of  two  dimensions.  It  is  quantity 
of  labor  multiplied  by  quality  of  labor.  Its  true  measure  is 
product.  It  is,  therefore,  impossible  to  say  that  industries 
have  ever  reached  their  highest  possibilities  upon  the  basis 
of  such  capital  as  a  country  at  any  time  possessed,  for  this 
would  be  equivalent  to  saying  that  genius  for  invention 
had  exhausted  itself,  and  that  organization  of  labor  had  at- 

*  This  subject  of  the  development  of  economic  wants  is  an  extremely  intri- 
cate 056.  It  may  be  that  the  position  here  assumed  will  be  criticised,  because  it 
often  occurs  that  during  a  war  consumption  of  luxuries  increases.  The  explana- 
tion of  this  is,  that  an  appreciation  of  the  comforts  of  life  is  of  slow  development. 
It  requires  culture.  But  luxury  consumption  permits  ostentation,  and  the  only 
use  to  which  one  who  has  spent  thirty  years  in  poverty  can  put  riches  is  that  of 
display.  The  appearance,  then,  of  luxury  consumption  during  the  continuance  of 
a  war  is  quite  conclusive  proof  of  some  disturbance  in  the  ordinary  distribution 
of  products.  It  means  that  uncultured  men  are  getting  rich  out  of  the  country's 
disaster.  There  are  some  interesting  suggestions  bearing  on  this  subject  m 
Roscher,  "  Political  Economy,"  book  iv. 

2  Mill's  "  Principles  of  Political  Economy,"  book  i,  ch.  v,  §  1. 

'  Jevons'a  "  Theory  of  Political  Economy,"  pp.  214,  215. 
6 


70  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

tained  perfection.  But,  on  tlie  contrary,  experience  allows 
the  conclusion  that  increased  product  always  responds  to  in- 
creased motive.  The  only  question,  then,  as  to  the  effect  of 
a  rise  in  the  rate  of  government-interest  is,  whether  such 
an  inducement  is  of  the  sort  to  which  industrial  managers 
will  respond,  and  this  is  answered  affirmatively  by  the  an- 
nals of  certain  great  periods  of  loan-contracting.  If  the 
conditions  are  such  that  the  increased  supply  of  commodi- 
ties will  not  result  in  a  fall  of  their  price,  general  business 
will  display  increased  activity  in  order  to  supply  the  state 
with  such  funds  as  it  demands ;  and  these  conditions  are  met 
if  we  suppose  a  government  to  have  taken  the  second  step  in 
the  loan  policy,  to  make  headway  against  the  financial  exi- 
gencies of  a  great  war.  It  thus  appears  that  the  government 
may  hope  to  secure  subscriptions  to  its  loans  from  those  en- 
gaged in  active  industry,  and  that  the  source  from  which  these 
subscriptions  will  be  paid  is  the  result  of  intensified  labor. 

The  economic  principle  upon  which  one  relies  for  the 
truth  of  this  conclusion  is  that  part  of  the  so-called  law  of 
supply  and  demand  which  happens  to  be  true.  The  truth  in 
this  law  is  that  demand  precedes  supply,  and  that,  given  a 
clear  and  definite  demand,  there  will  be  a  supply.  This  is 
nowhere  more  clearly  perceived  than  in  the  history  of  inven- 
tions. Like  pork  or  cotton,  a  supply  of  inventions  follows  a 
general  recognition  of  their  demand.  This  is  shown  by  the 
history  of  the  textile  industries.  But  the  most  pertinent  il- 
lustration, because  it  has  to  do  with  the  changed  conditions 
introduced  by  the  advent  of  a  war,  is  found  in  the  influence 
which  the  outbreak  of  the  rebellion  exerted  upon  the  de- 
velopment of  agricultural  machinery.  Labor  was  withdrawn 
from  agricultural  pursuits  to  follow  the  fortunes  of  war,  but 
the  demand  for  agricultural  products  was  as  great  as  ever ;  in 
this  manner  the  need  of  new  machinery  made  itself  felt,  a  need 
to  which  the  inventive  genius  of  the  American  people  quickly 
responded.  The  language  of  the  report  of  the  Commissioner 
of  Patents  for  1863  is  pertinent  to  the  question  in  hand. 
He  says : 


INDUSTRIAL  EFFECTS  OF  PUBLIC  BORROWING.  Yl 

"  The  most  striking  fact  connected  with  this  class  (Class  A, 
Agriculture)  is  the  rapid  increase  of  applications  filed.  Not- 
withstanding half  a  million  of  our  agriculturists  have  been 
withdrawn  from  the  farm  to  engage  in  military  service,  still 
the  number  of  applications  for  patents  on  agricultural  imple- 
ments (exclusive  of  reapers,  bee-hives,  horse  hay-forks,  and 
horse  hay-rakes)  has  increased  from  three  hundred  and  fifty  in 
1861  to  five  hundred  and  two  in  1863.  At  first  thought  such  a 
result  would  seem  an  anomaly,  but  it  is  this  large  drain  upon 
the  laboring  classes  which  has  caused  a  greater  demand  than 
usual  for  labor-saving  machinery.  .  .  .  Machines  for  sowing 
and  planting  seed  are  the  most  numerous  in  this  class,  and  they 
have  been  brought  to  such  a  state  of  perfection  that  one  can 
now  be  supplied  with  those  that  plant  everything,  from  a  mus- 
tard-seed to  a  potato,  either  by  hand  or  animal  power,  at  prices 
varying  from  one  hundred  dollars  down  to  two  dollars  and 
fifty  cents." 

The  commissioTier  then  continues  the  description  of  the 
agricultural  inventions  of  the  year,  and  says,  in  conclusion  : 

"  Indeed,  throughout  this  entire  class  there  appears  to  be 
an  increased  activity  in  the  effort  to  substitute  labor-saving 
machinery  for  manual  labor,  and,  judging  from  appearances, 
with  the  most  beneficial  results."  ^ 

Loans  secured  at  rates  of  interest  abnormally  high. 

As  contrasted  with  this  second  step  in  the  placement  of 
public  bonds,  which  is  characterized  by  a  rate  of  interest 
slightly  above  the  normal  rate,  the  government  may  be  said 
to  have  taken  the  third  and  last  step  when  it  offers  abnormal 
inducements  to  secure  control  over  capital.  For  example, 
England,  at  the  time  of  the  Napoleonic  wars,  as  also  the 
Federal  Government  during  the  late  rebellion,  entered  upon 
this  third  stage  of  deficit  financiering.  In  both  instances  the 
governments  sold  their  paper  at  heavy  discount.  The  evil 
consequences  of  offering  excessive  rates  of  interest  for  money 
are  two.  In  the  first  place,  it  tends  to  dry  up  the  source  of 
income  upon  which  the  treasurer  must  rely  in  the  future  ; 
and  in  the  second  place,  it  results  in  a  saving  forced  from 
the  laborers,  the  benefits  of  which  the  laborers  do  not  enjoy. 

J  "  Patent-Office  Report,"  1863,  vol.  i,  p.  21. 


Y2  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

That  is  to  say,  under  tlie  industrial  conditions  introduced  by 
public  borrowing  at  high  rates,  the  employers  have  it  in  their 
power  to  force  their  workmen  to  live  on  less  than  their  usual 
allowance,  and  with  the  difference  to  buy  bonds  in  their 
own  name.  Let  us  look  a  little  more  closely  into  these  re- 
sults. 

It  has  been  already  explained  how  that  those  industries 
on  the  verge  of  bearing  no  profit  were  abandoned  in  con- 
sequence of  increased  returns  from  investment  in  govern- 
ment paper.  But  this  idea  of  normal  profit  is  altogether 
arbitrary.  It  depends  at  any  time  upon  the  alternatives  pre- 
sented to  him  who  desires  to  invest  capital,  and  the  condi- 
tions which  serve  as  the  basis  of  his  calculations  must  change 
with  every  successive  rise  in  government  interest.  Thus, 
suppose  the  normal  rate  to  be  5  per  cent,  and  the  govern- 
ment to  offer  7  per  cent.  All  industries  upon  the  verge  of 
the  profit  line  when  interest  was  5  per  cent  will  free  their 
capital  for  the  use  of  the  state ;  but  now  T  per  cent,  or  some 
rate  between  5  and  Y,  comes  to  be  the  established  market 
rate,  and  the  consequence  is  that  other  industries  are  in  this 
manner  brought  into  the  same  relative  position,  so  far  as 
j)rofit  is  concerned,  as  were  those  industries  which  felt  the 
influence  of  the  first  rise  in  government  rates.  If,  now,  the 
rate  be  again  advanced,  these  in  their  turn  will  be  given  up, 
and  so  on  for  every  successive  increment  in  rate.* 

In  this  manner  there  is  established  within  the  community 
a  class  living  out  of  the  proceeds  of  taxes,  who  are  yet  not  of 
necessity  actively  engaged  in  current  production.  They 
were  originally  constant  producers  and  tax-payers ;  they  are 
now  at  liberty  to  become  idlers  and  tax-receivers.  Although 
the  fiscal  demands  of  the  government  remain  as  great  as  be- 

'  It  is  not  true  that  all  such  industries  will  disappear.  A  suflBcient  num- 
ber only  will  place  their  freed  capital  at  the  disposal  of  the  government 
that  the  diminished  product  will  enable  those  remaining  to  realize  a  higher 
profit.  Such  persons  will  not  abandon  their  business.  Nor  will  those  engaged 
in  supplying  the  necessaries  of  life  turn  their  capital  to  the  control  of  the  state, 
for  they  are  in  a  position  to  demand  a  higher  price  for  their  products,  and  so  se- 
cure to  themselves  the  benefit  of  an  advance  in  the  rate  paid  for  capital. 


INDUSTRIAL  EFFECTS  OF  PUBLIC  BORROWING.  73 

fore,  it  has  deprived  itself  of  tlie  assistance  of  certain  of  its 
subjects.  It  is  in  this  manner  that  excessive  appeals  through 
loans  tend  to  dry  up  the  source  of  revenue  upon  which  the 
state  must  relj.  Indeed,  a  government  entering  upon  this 
third  step  in  loan-contracting  is  in  the  position  of  a  man  who 
consumes  his  capital  in  running  expenses  ;  it  is  onlj  a  ques- 
tion of  time  when  it  will  reach  the  end  of  its  financial  re- 
sources. 

But  how  does  this  matter  stand  with  regard  to  the  wage- 
receiving  class  ?  The  quite  universal  testimony  of  history  is 
that  any  great  industrial  disturbance  rests  most  heavily  upon 
those  who,  possessing  no  property,  depend  for  an  income 
upon  their  daily  labor.  It  makes  no  difierence  whether  this 
disturbance  arise  from  a  disordered  currency,  from  inter- 
rupted commerce,  or  from  an  excessive  appeal  on  the  part  of 
the  state  for  revenue — it  is  the  wage-receiving  class  that  feels 
most  sensitively  the  change.  Avoiding  all  controversy  upon 
the  doctrine  of  wages,  it  will  be  sufficient  to  call  attention  to 
the  order  in  which  inflated  prices  find  their  way  into  the 
quotations  of  various  commodities.  The  argument  thus  im- 
plied is  easy  of  comprehension.  Since  all  goods  are  not 
equally  sensitive  to  those  influences  affecting  price,  it  follows 
that  such  commodities  as  are  most  tardy  in  their  advance 
must  be  at  a  relative  disadvantage  when  exchanged  for 
other  commodities.  A  general  rise  in  price,  therefore,  must 
be  to  the  detriment  of  those  goods  the  last  to  move. 

What,  then,  is  the  order  in  which  commodities  respond 
to  those  influences  which  effect  a  general  rise  in  prices  ? 
Upon  this  question  also  we  may  avoid  tedious  discussion,  for 
on  one  point,  at  least,  there  can  be  no  difference  of  opinion. 
"Wages  always  follow,  upon  a  rising  market,  the  price  of 
those  commodities  from  which  laborers  subsist.  From  this 
it  appears  that  when  a  general  rise  in  prices  takes  place, 
wages  at  the  old  rate  must  be  paid  for  goods  at  the  new  and 
higher  prices,  which  means  that  real  wages  decrease  because 
of  the  tardy  rise  in  nominal  wages.  We  may  then  clearly 
understand  how  a  financial  policy  which  results  in  the  rapid 


74  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

inflation  of  general  prices  must  work  to  the  injury  of  those 
who  depend  upon  wages ;  and  we  may  also  easily  trace  the 
source  from  which  goremment  loans  are  filled  under  such 
conditions.  It  is  the  employer  who  buys  the  bonds,  but 
he  pays  for  them  out  of  his  extraordinary  profits,  and  these 
profits  he  secures  by  a  reduction  of  real  wages.  That  is  to 
say,  he  sells  for  the  new  and  higher  prices  goods  which  were 
produced  at  the  old  rate  of  wages.  A  financial  policy  which 
leads  to  such  a  result  is  open  to  the  most  severe  criticism  of 
which  the  science  of  finance  admits.  Not  only  does  it  take 
from  the  public  at  large  more  than  is  received  into  the  treas- 
ury, but  it  coercively  deprives  one  set  of  citizens  of  a  part  of 
the  product  of  their  labor  for  the  benefit  of  others. 

The  history  of  England  from  1790  to  1815  supports  the 
opinion  here  expressed,  and  presents  a  most  pertinent  illus- 
tration of  the  burdens  thrown  upon  the  laboring  classes  by  a 
vicious  policy  of  treasury  management ;  but  quotations  from 
American  prices  during  our  late  war  will  serve  the  purpose 
equally  well,  and  it  is  proper  to  remember  that  criticism,  like 
charity,  should  begin  at  home.  Mr.  David  A.  "Wells  is  a 
most  careful  statistician,  and,  with  the  machinery  of  the 
United  States  Government  at  his  control  for  investigation,  he 
arrived  at  the  following  conclusion  :  "  Up  to  the  commence- 
ment of  the  year  1867,  the  general  effect  of  the  agencies 
growing  out  of  the  war  had  been  to  occasion  an  average  ad- 
vance in  the  price  of  commodities  to  the  extent  of  about  90 
per  cent,  while  the  corresponding  average  advance  in  wages 
was  not  in  excess  of  60  per  cent."  ^  This  statement  is  capa- 
ble of  a  simple  though  a  somewhat  startling  interpretation. 
It  means  that  the  loans  contracted  during  the  late  war  were 
in  part  filled  from  the  coerced  savings  of  the  laboring  classes. 
The  new  source  of  revenue  opened  when  the  Government 
offered  the  excessive  inducements  for  the  loan  of  capital,  was 
created  by  a  fall  in  the  rate  of  real  wages." 

'  "  Report  of  the  Special  Commissioner  of  the  Revenue,"  1868,  p.  14. 
^  That  each  may  see  for  himself  that  the  commodities  upon  which  Mr.  Wells 
has  based  his  calculations  are  necessaries,  the  following  table  is  inserted,  which 


INDUSTRIAL   EFFECTS  OF  PUBLIC  BORROWING. 


75 


It  thus  appears  that  when  the  policy  of  public  borrowing 
is  carried  to  an  extreme,  it  works,  in  one  respect  at  least, 
like  a  tax ;  for  they  who  curtail  their  personal  expenditures, 
that  the  demands  of  the  government  may  be  met,  do  not  do 
so  willingly,  but  are  forced  to  make  the  sacrifice.  But,  from 
another  point  of  view,  such  borrowing  is  unlike  a  tax,  for 
the  payment  is  not  linal  as  between  the  government  and 
those  citizens  with  whom  the  government  directly  deals. 
The  collecting  agent  is  not  a  public  officer,  who  receives  a 
fixed  salary  for  his  services,  but  the  employer  of  labor  who 
receives  a  commission  in  the  form  of  public  bonds  equal  to 
the  full  amount  of  capital  collected,  plus  whatever  premium 
the  distress  of  the  government  permits  him  to  secure.  Thus 
such  boiTowing  works  as  a  tax  that  entails  the  necessity  of 
a  new  tax,  equal  at  least  to  the  full  amount  of  the  sums  se- 
cured. Its  practical  effect  upon  the  laboring  classes  is  to 
coerce  from  them  a  part  of  the  product  of  their  labor,  which 
sum  the  government  accredits  to  their  employers.  We  may 
not  on  this  account  censure  any  individual  employer,  for, 


shows  the  average  price  of  some  of  the  leading  articles  of  domestic  consump- 
tion, and  in  house-rent,  in  1867,  as  compared  with  1860-'61,  in  the  manufactur- 
ing towns  of  the  United  States.     Cf.  Report  of  1868,  p.  15 : 


ARTICLES. 

Per  cent  in- 
crease of  1S67 
over  1860. 

General  averages. 

Flour  and  other  breadstuffs .... 

Meats — fresh  and  salted 

Butter 

Fish — dry  and  pickled 

Potatoes  and  other  vegetables. . 
Beans 

92 
86 
91^ 

74 
79 
92 
88 
99 
117 
6U 
57" 
98 
75 
65 
71 
81i 

Average  increase  for  provisions 
is  86  per  cent. 

Average  increase  in  price  of  do- 
mestic  clothing  is   86J    per 
cent. 

Sugar  and  molasses 

Tea 

Coffee 

Milk 

Fuel— coal,  wood,  etc 

General  average  increase  in  cost 

Domestic  cotton  goods 

Clothing 

of  provisions,  clothing,  rent, 

House-rent 

75  per  cent. 

Board  for  men 

Board  for  women 

76  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

under  tlie  pressure  of  competition,  his  liberty  of  action  is  not 
large  ;  it  is  the  pernicious  financial  policy  adopted  by  the  ad- 
ministration that  should  be  held  responsible.  The  results 
portrayed  are  the  necessary  consequence  of  an  excessive  ap- 
peal to  public  credit.  A  diminution  of  real  wages  must 
always  follow  at  the  heels  of  such  financiering. 

The  general  conclusion  of  the  foregoing  analysis  is  as 
follows :  Public  loans  influence  industrial  affairs  through  the 
medium  of  capital,  but  the  character  of  this  influence  de- 
pends upon  the  nature  of  the  loan,  upon  the  conditions  under 
which  it  is  contracted,  and  upon  the  fund  of  capital  from 
which  it  is  filled.  So  long  as  the  placement  of  a  debt  by  the 
state  does  not  affect  the  market  quotations  of  commodities, 
the  full  extent  of  its  influence  is  to  divert  capital,  which 
might  otherwise  have  gone  to  extend  existing  industries,  to 
the  purposes  of  the  government.  But  the  moment  the 
state  offers  unusual  inducements,  the  price  of  commodities  is 
thereby  affected.  Future  loans  must  on  this  account  be  con- 
tracted on  a  rising  market,  and  by  taking  this  step  the  gov- 
ernment enters  upon  a  policy  which  contains  the  germ  of 
industrial  disturbance  and  social  injustice.  Moreover,  such  a 
policy  is  suicidal,  for  it  tends  to  dry  up  the  source  from 
which  all  revenue  must  be  derived.  At  the  same  time,  it 
must  not  be  forgotten  that  there  is  a  wide  margin  between  a 
slight  increase  of  the  normal  rate  of  interest  and  an  offer  of 
excessive  inducements ;  and,  although  the  industrial  and 
financial  principles  are  the  same  in  either  case,  the  practical 
results  may  be  very  different.  It  is,  therefore,  impossible  to 
determine  how  far  a  government  is  justified  in  raising  the 
rate  on  public  bonds,  unless  the  probable  results  of  this 
method  of  securing  money  be  compared  with  what  must  fol- 
low from  running  the  taxing  machinery  at  a  higher  rate  of 
speed.  It  is  sufiicient  for  the  present  to  learn  the  manner  in 
which  public  borrowing  is  related  to  industrial  life. 


CHAPTER  Y. 

WHEN   MAY   STATES   BOKKOW   MONET? 

OuK  study  in  the  foregoing  cliapters  has  led  to  the  dis- 
closure of  many  tendencies,  dangerous  to  the  highest  welfare 
of  organized  society,  which  seem  to  be  a  necessary  part  of 
the  borrowing  system.  But  governments  may  not,  on  this 
account,  be  reasonably  prohibited  from  the  employment  of 
their  credit.  The  only  practical  importance  of  such  a  dis- 
closure is  to  suggest  the  necessity  of  further  inquiry  respect- 
ing the  conditions  under  which  an  appeal  to  public  credit 
may  be  justified. 

It  must  be  noticed  at  the  outset,  that  this  inquiry  can  not 
be  safely  undertaken  as  an  isolated  question.  Governments 
do  not  borrow  for  the  sake  of  borrowing.  The  necessity  of 
obtaining  money  is  always  an  assumed  23remise  ;  and  it  is 
upon  this  premise,  and  in  view  of  the  alternative  presented 
of  borrowing  money  or  levying  taxes,  that  financial  writers 
defend  an  appeal  to  credit.  And  it  may  be  added,  further  to 
simplify  the  question,  that  the  minister  of  finance  has  noth- 
ing to  do  in  determining  the  nature,  the  time,  or  the  extent 
of  the  demand  made  by  the  government  upon  the  public 
treasury.  If  the  government  wants  warming-pans  to  send  to 
the  South  Sea  Islands,  it  is  his  business  to  supply  the  warm- 
ing-pans in  the  most  economical  manner  possible. 

There  are  many  publicists  who  write  against  public  debts 
as  though  the  question  were  one  of  appropriation  or  no  ap- 
propriation, whereas,  in  reality,  the  question  is  one  of  debt 
or  taxes.     The  study  of  the  present  chapter  proceeds  upon 


78  PUBLIC  EOHROWIXG  AS  A  FTXAS'CIAL  TOLICY. 

the  assumption  that  the  demands  of  the  government  for 
money  are  just ;  otherwise  neither  a  loan  nor  a  tax  is  capable 
of  defense. 

Let  us  then  inquire  under  what  conditions  deficit  financier- 
ing may  be  justified.  "We  need  not  burden  our  study  with  an 
attempt  to  enumerate  all  the  cases  in  which  credit  may  be 
with  propriety  employed ;  our  purpose  will  be  better  served 
by  some  classification  from  which  the  principles  involved  may 
be  discovered.  Such  a  classification  is  the  following,  dis- 
closing as  it  does  the  conditions  in  which  convenience,  neces- 
sity, or  pubhc  economy  demands  the  use  of  public  credit. 

1.  A  want  of  coincidence  between  estimated  and  actual 
revenue,  if  the  error  come  in  the  form  of  a  deficit,  calls  for 
a  temporaiy  loan. 

2.  The  advent  of  some  unforeseen  financial  emergency,  as 
war,  famine,  fire,  flood,  and  the  like,  when  the  government  is 
called  upon  to  act  promptly  if  at  all,  is  regarded  as  a  just 
occasion  for  a  resort  to  the  money  market. 

3.  A  determination  on  the  part  of  the  government  to 
undertake  some  public  work  of  such  a  nature  that  some  con- 
siderable time  must  intei-vene  between  its  beginning  and  its 
completion,  presents  a  necessity  for  the  employment  of  state 
credit.  The  cases  here  set  forth  must  be  subjected  to  separ- 
ate analysis. 

Loans  may  he  used  to  cover  a  temporary  deficit. 
It  is  no  occasion  for  surprise  or  censure  that  the  close 
of  a  fiscal  year  shows  calculations  respecting  income  and  ex- 
penditure to  have  been  incorrect.  It  is  seldom  the  case 
that  a  budget  as  executed  harmonizes  with  a  budget  as  esti- 
mated. This,  indeed,  can  not  be  expected,  for  many  of  the 
elements  that  enter  into  the  calculation  are  entirely  beyond 
the  control  of  the  financier.  Even  with  regard  to  revenue, 
the  factors  are  not  subject  to  precise  estimate.  The  proceeds 
of  a  poll-tax  may  be  calculated  with  some  degree  of  assur- 
ance. The  same  may  be  said  of  a  land-tax,  or  even  of  an 
income  tax,  provided  it  has  been  long  estabhshed.     But  indi- 


WHEN  MAY  STATES  BORROW  MONEY?        79 

rect  taxes  of  all  sorts  depend  for  their  effieiencj  upon  tlie 
general  trade  of  the  country.  The  revenue  arising  from 
customs  duties,  for  example,  is  determined  by  the  amount  of 
dutiable  goods  imported,  which  in  its  turn  depends  upon  the 
character  and  extent  of  general  trade.  Elements  of  uncer- 
tainty, therefore,  are  necessarily  introduced  into  the  framing 
of  the  budget,  even  upon  the  side  of  revenue. 

Questions  of  public  expenditure  he  also  beyond  the  di- 
rect control  of  the  financier.  The  rule  according  to  which  a 
private  indi^^dual  manages  his  personal  expenditure  is  en- 
tirely reversed  in  matters  of  public  finance.  The  question  is 
no  longer  how  expenditure  may  be  kept  within  a  fixed  in- 
come, but  how  income  may  be  brought  to  coincide  with  a 
given  rate  of  expenditure  determined  upon.  It  frequently 
occurs  that  some  change  in  established  policy  involves  in- 
creased expenditure,  and  that  this  new  demand  must  be 
immediately  met.  If  this  increased  expenditure  bids  fail*  to 
call  for  a  continuous  annual  payment,  it  is  wise  to  levy  taxes 
equal  to  the  new  and  constant  demand  ;  yet  in  this  case, 
money  must  in  the  first  instance  be  borrowed,  for  new  taxes 
can  not  become  immediately  productive.  On  the  other  hand, 
if  the  expenditure  is  hkely  to  occur  but  once,  industries 
wiU  be  less  disturbed  by  securing  the  necessary  money 
through  loans,  with  pro^'ision  for  gradual  repayment,  than  if 
a  large  sum  be  taken  in  a  single  year  through  an  increase  of 
taxes.  It  seems,  then,  that  both  convenience  and  economy 
justify  the  use  of  temporary  debts,  whenever  estimates  fall 
short  of  actual  expenditm-es,  or  when  some  change  in  public 
policy  presents  new  demands  to  the  treasury  department 
that  must  be  immediately  met. 

But  the  real  question  that  lies  at  the  bottom  of  the  policy 
of  temporary  loans  goes  deeper  into  the  science  of  finance, 
and  suggests  itself  only  when  we  inquire  respecting  the  alter- 
native presented  to  the  administration,  supposing  the  pohcy 
of  temporary  debt  to  be  discarded.  The  alternative  is  to 
overestimate  expenditure  and  underestimate  revenue,  in  or- 
der that  such  discrepancies  in  the  budget  as  may  arise  should 


80  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

always  be  on  the  side  of  a  surplus.  The  question,  then,  re- 
duces itself  to  this  :  Since  perfect  harmony  in  the  budget  can 
not  be  expected,  do  sound  rules  of  finance  require  the  error 
to  fall  on  the  side  of  surplus  or  of  deficit  ?  According  to  the 
maxims  of  domestic  economy,  a  constantly-recurring  surplus 
is  accepted  as  evidence  of  good  financiering ;  but  it  is  doubt- 
ful if  such  maxims  are  applicable  to  national  affairs. 

There  are  three  reasons,  as  it  appears  to  me,  why  a  con- 
stant deficit  should  be  chosen  rather  than  a  constant  surplus. 

In  the  first  place,  the  moral  effect  of  a  deficit  upon  the 
electors  as  well  as  upon  the  legislators  is  good.  The  people 
wiU  be  more  careful  to  exercise  their  constitutional  preroga- 
tive in  the  control  of  expenditures  if  the  minister  of  finance  is 
obliged  to  use  the  language  of  poverty,  than  if  they  are  made 
to  feel  rich  by  the  portrayal  of  an  ever-increasing  surplus  ;  the 
legislative  body,  also,  will  be  more  careful  as  to  appropria- 
tions, if  deficits  stare  them  in  the  face,  than  if  their  deliber- 
ations are  carried  on  in  the  presence  of  an  overflowing  treasury. 
There  can  be  no  more  pertinent  testimony  to  this  claim  than 
that  presented  by  the  history  of  the  United  States  Congress 
during  the  last  few  years.  Resting  secure  in  the  carelessness  of 
a  people  conscious  of  being  rich,  and  having  at  their  disposal 
an  enormous  revenue,  our  national  representatives  have  made 
apj)ropriations  which  would  have  caused  the  downfall  of  any 
party  had  those  appropriations  rendered  necessary  an  appeal 
to  taxes,  or  even  a  resort  to  temj^orary  loans.  The  peace  ex- 
penditure of  the  year  ending  June  30, 18G0,  was  $77,000,000, 
of  which  $17,000,000  went  to  the  service  of  the  public  debt. 
Exclusive  of  the  debt  service,  there  was  an  expenditure  of 
$60,000,000,  while  the  gross  income  amounted  to  $81,000,- 
000.  Place  this  budget  by  the  side  of  that  of  1882.  At 
this  latter  date,  the  gross  income  amounted  to  $108,500,000, 
while  the  expenditure  for  ordinary  purposes  amounted  to 
$257,500,000,  leaving  a  surplus  of  $145,000,000.  In  this 
ordinary  expenditure  there  is  included  the  debt  service  of 
$71,000,000,  which,  being  deducted,  leaves  $186,000,000  as 
the  cost  of  the  present  peace  establishment.     It  is  this  sum 


WHEN  MAY  STATES  BORROW  MONEY? 


81 


which  comes  properly  into  comparison  with  the  $60,000,000 
of  1860.  There  thus  appears  an  increase  of  $126,000,000  in 
the  ordinary  expenditures  within  a  period  of  twenty  years. 
Of  course,  the  necessary  expenses  of  the  government  have 
been  somewhat  extended  with  the  increase  of  population. 
The  necessary  pensions,  also,  are  included  in  this  amount 
properly  chargeable  as  a  legacy  of  the  war.  But  every  fair 
allowance  being  made,  there  yet  remains  an  extension  of  ex- 
penditure which  can  only  be  explained  by  the  fact  that  the 
great  problem  of  modern  legislators  has  been,  how  to  spend 
the  public  moneys.' 

The  claim  that  is  here  urged  in  support  of  deficit  finan- 
ciering is  especially  pertinent  when  the  machinery  of  taxa- 
tion is  used  for  other  than  revenue  purposes,  for,  under  such 
conditions,  those  interested  in  the  maintenance  of  existing 
fiscal  laws  will  show  themselves  very  ingenious  in  finding 
occasions  for  public  expenditure.  It  is  not  too  much  to  say 
that  the  Arrearage  Pension  Acts,  by  means  of  which  the 
treasury  was  relieved  of  its  plethora  of  funds,  find  their 
true  explanation  in  the  desire  of  Congress  to  maintain  in- 
violate the  system  of  protective  duties.  This  could  not  be 
done  in  the  face  of  an  ever-increasing  surplus,  and  protec- 
tionist politicians  did  not  dare  to  advocate  the  abolition  of 
the  whisky  tax ;  it  only  remained  for  them  to  spend  the 
money. 

The  argument  may  be  reduced  to  this  statement.  The 
full  realization  of  self-government  requires  a  delicate  adjust- 

^  The  full  strength  of  this  late  tendency  toward  an  extension  of  expenditure 
is  more  perfectly  exposed  if  we  take  into  view  a  longer  period  for  comparison. 
The  following  table  presents  the  pertinent  facts  as  they  appear  since  the  close  of 
the  second  war  with  England. 


A.  D. 

Ordinary  expen- 
diture. 

Percentage  in- 
crease. 

Average  annual 
increase. 

1818 

$21,000,000 
31,000,000 
60,000,000 

186,000,000 

50 

100 
210 

1838 

$500,000 

1860 

1,320,000 

1882 

5,725,000 

82  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

raent  of  budgetary  machinerj,  but  surplus  revenue  acts  as  a 
weight  which  throws  that  machinery  out  of  balance.  Close 
estimates,  even  though  they  lead  to  deficits,  are  essential  to 
good  treasury  management. 

But,  in  the  second  place,  a  deficit  at  the  close  of  a  year 
brings  for  a  second  time  before  the  legislative  body  the  ap- 
propriations of  the  year  previous.  A  revisionary  study  of 
all  expenditures  is  in  this  manner  rendered  necessary,  and 
this  tends  to  secure  a  stricter  control  over  future  appropria- 
tions. The  laws  of  many  states  provide  for  temjDorary  loans, 
sometimes  in  the  form  of  a  loan  from  one  appropriation  that 
is  in  excess  to  another  in  which  there  occurs  a  deficit,  some- 
tiines  the  government  is  authorized  to  appeal  directly  to  the 
market ;  but  in  either  case  the  action  of  the  minister  of 
finance  must  come  uj)  for  approval  or  disapproval  when  his 
report  is  presented  to  the  legislative  body. 

The  third  claim  in  favor  of  deficit  financiering  is  of  a 
somewhat  different  nature,  since  it  brings  to  our  notice  the 
commercial  distress  which  may  be  occasioned  by  adopting 
th,e  competing  policy.  It  is  a  well-known  principle  that  the 
value  of  money  is  inversely  as  its  amount ;  and  if,  through 
a  constant  excess  of  revenue  over  expenditure,  large  sums 
are  withdrawn  from  circulation ;  or  if,  through  any  consid- 
erable excess  in  the  revenue  of  one  year,  the  average  amount 
of  money  in  the  hands  of  the  people  be  reduced,  the  country 
will  suffer  the  inconvenience  which  alway  attends  falling 
values.  It  is  true  that  market  quotations  will  not  be  influ- 
enced unless  the  withdrawal  of  money  continue  for  some 
considerable  time ;  but  one  can  not  on  this  account  deny  the 
pertinency  of  the  criticism,  for  the  evils  of  a  contracting 
currency  are  felt  long  before  they  are  registered  in  general 
prices.  A  good  monetary  system  is  like  a  strong  fence  about 
industries,  and  should  be  guarded  with  solicitous  care,  lest 
industries  be  thrown  open  to  unusual  influences.  In  case 
the  government  adopting  the  policy  of  surplus  financiering 
is  liable  for  the  payment  of  a  large  debt,  the  evil  conse- 
quences we  have  suggested  need  not  necessarily  follow,  for 


WHEN  MAY  STATES  BORROW  MONEY?  83 

the  revenue  in  excess  of  current  needs  miglit  be  used  in  pay- 
ment of  its  obligations.  Such  aa  employment  of  money 
would  have  no  more  influence  upon  prices  than  when  used 
in  the  course  of  ordinary  business  by  a  corporation  or  by  a 
private  person.  It  is  also  true  that  the  government  might 
deposit  its  surplus  with  banks,  and  in  this  manner  return  the 
money  to  circulation.  Without  attempting  a  discussion  of 
this  proposal,  it  will  be  sufficient  to  suggest  that  the  experi- 
ence of  the  United  States  during  the  Jacksonian  period, 
when  such  deposits  were  made,  gives  little  encouragement 
that  such  a  plan  would  work  to  the  advantage  of  the  public. 
For  such  reasons  as  these  the  policy  of  systematic  deficits 
is  believed  to  be  in  more  perfect  harmony  with  sound  rales 
of  finance  than  the  policy  of  a  continuous  surplus.  It  ren- 
ders fiscal  machinery  more  sensitive  to  the  demands  of  con- 
stitutional government ;  it  bi-ings  appropriations  a  second 
time  under  the  scrutiny  of  the  legislature ;  and  it  frees  in- 
dustries from  the  fears  of  disturbance  arising  from  arbitrary 
fluctuations  in  money  amount.  But,  if  we  admit  the  neces- 
sity of  deficits,  we  commit  ourselves  to  the  defense  of  tem- 
porary loans ;  and  the  only  danger  that  lies  in  such  a  policy 
is  that  the  temporary  debts  should  be  converted  into  perma- 
nent obligations.  Against  such  a  tendency  the  financier  should 
be  ever  on  his  guard. 

Loans  may  he  used  to  meet  a  fiscal  emergency. 

Following  out  the  classification  already  suggested,  we 
come  now  to  consider  a  fiscal  emergency  as  occasion  for  the 
employment  of  public  credit.  A  fiscal  eniergency  may  be 
said  to  have  arisen  when  the  government  must  not  only  have 
money,  but  needs  the  money  at_once,  in  order  to  avert  an 
impending  calamity.  Thus,  threat  of  foreign  invasion,  or 
some  unforeseen  disaster,  may  be  the  occasion  of  such  an 
emergency.  Under  such  conditions,  it  is  claimed  that  a  gov- 
ernment is  justified  in  selling  bonds  to  secure  the  needed 
capital.     This  justification  rests  upon  two  considerations : 

1.  On  account  of  the  pressing  nature  of  the  demand,  the 


84  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

administration  can  not  wait  until  the  proceeds  of  new  taxes 
swell  the  treasury  fund. 

2.  Any  measures  which  a  government  might  take  to  pro- 
vide against  possible  emergencies  are  bound  up  with  greater 
financial  evils  than  are  entailed  by  the  loan  itself. 

As  regards  the  tardy  movement  of  newly  levied  taxes, 
there  can  be  no  question.  Some  considerable  time  is  re- 
quired for  a  new  fiscal  law  to  become  operative,  and  several 
years  must  elapse  before  a  new  tax  can  reach  its  highest  de- 
gree of  eflSciency.  The  history  of  direct  taxation  in  the 
United  States  serves  as  a  good  illustration  of  this  fact.  The 
first  attempt  to  raise  money  in  this  manner  was  legalized  by 
an  act  of  1798,  but  the  treasury  reports  for  two  succeeding 
years  fail  to  show  from  it  any  return.  The  Jefferson  gov- 
ernment received  the  greater  part  of  the  revenue  of  which 
this  tax  was  the  source — a  government,  it  will  be  remem- 
bered, that  embraced  the  first  opportunity  to  effect  the  repeal 
of  the  law. 

Again,  on  the  occasion  of  the  war  of  1812,  a  direct  tax 
was  levied.  This  is  especially  pertinent  to  the  question  in 
hand,  for,  in  this  instance,  a  revenue  system  was  established 
to  meet  an  emergency.  This  system,  however,  did  not  be- 
come productive  until  the  second  year  after  its  establishment, 
and  it  reached  its  highest  efficiency  in  1816,  after  the  press- 
ure upon  the  treasury  had  passed.  The  entire  system  of 
internal  duties,  established  during  the  late  war,  testifies  to 
the  same  fact.  It  did  not  get  fairly  under  way  till  the  latter 
part  of  1863.  The  total  amount  of  income  for  the  four  years 
previous  to  April  1,  1865,  was  $314,000,000 ;  but  during  the 
four  years  subsequent  to  this  date  the  system  of  internal  duties 
brought  into  the  public  treasury  $967,000,000.  This  expan- 
sion can  not,  as  in  the  case  of  customs,  be  traced  to  an  exten- 
sion of  trade ;  the  true  explanation  is,  that  it  takes  time  for  a 
new  fiscal  system  to  become  remunerative.  I^ew  taxes,  there- 
fore, can  not  be  depended  upon  to  meet  an  emergency. 

But  why  may  not  the  government  raise  the  rate  upon 
existing  t^xes?     This  may  be  done  with  success  provided 


WHEN  MAY  STATES  BORROW  MONEY?  85 

the  fiscal  system  has  been  shaped  to  prepare  for  such  a  meas- 
ure; but  it  is  usually  the  case  that  existing  rates  are  so 
high  that  an  increase  in  the  rate  will  not  increase  revenue. 
But,  should  the  general  tariff  be  below  the  revenue  rate,  it 
would  yet  be  unwise  for  a  government  to  entertain  such  a 
proposal  to  cover  an  emergency.  All  changes  in  rates  that 
effect  prices  should  be  well  advertised,  otherwise  the  fiscal 
measures  of  the  government  will  unnecessarily  disturb  indus- 
trial calculations.  A  tax  might  be  sprung  on  the  merchants, 
so  as  "to  catch  the  fall  trade,"  but  such  a  measure  does 
not  lie  among  the  possibilities  of  a  reputable  government. 
Our  conclusion,  then,  seems  to  be  unavoidable.  When  a 
great  and  sudden  emergency  comes  upon  the  country,  a  gov- 
ernment is  justified  in  resorting  to  public  credit,  so  far,  at 
least,  as  may  be  necessary  to  cover  the  period  intervening 
between  the  levy  of  new  taxes  and  the  time  at  which  they 
become  remunerative.  The  only  alternative  presented  is 
to  make  some  provision  in  ordinary  times  against  possible 
emergencies.  This  brings  us  to  the  second  consideration 
suggested  above. 

In  the  financial  policies  of  nations,  there  stand  forth  two 
methods  by  means  of  which  a  resort  to  loans  may,  for  a  time 
at  least,  be  obviated,  even  though  the  public  treasury  comes 
into  the  presence  of  immediate  and  pressing  demands.  These 
may  be  termed,  for  the  purpose  of  characterization,  the  Prus- 
sian and  the  English  method.  According  to  the  former,  it  is 
the  duty  of  the  minister  of  finance  to  lay  by,  during  a  period 
of  prosperity,  a  reserve  fund  that  may  be  used  in  time  of 
need ;  while  the  second  method  endeavors  to  accomplish  the 
same  end  by  maintaining  in  ordinary  times  certain  taxes  at 
a  low  rate,  in  order  that  the  rate  may  be  immediately  in- 
creased in  time  of  financial  stress.  Are  such  provisions  for 
fiscal  emergencies  defensible  ? 

Considering,  first,  the  question  of  reserves,  it  may  be  said 
that  the  sovereigns  of  Pnissia,  in  thus  maintaining  a  "  war- 
chest,"  conserve  the  tradition  of  the  founders  of  their  state. 
When  Frederick  II  came  to  the  throne,  he  received  from  his 


86  PUBLIC  BORROWING  AS  A  HNANCIAL  POLICY. 

father  a  fund  of  8,Y00,000  thalers,  and  at  his  death,  not- 
withstanding the  long  and  severe  struggles  of  his  reign,  he 
left  to  his  successor  a  fund  of  70,000,000  thalers.  This  policy 
is  the  introduction  into  modern  life  of  one  of  the  most  prom- 
inent features  of  ancient  financiering.  "  It  was  the  common 
practice  of  antiquity  to  make  provision  in  times  of  peace  for 
the  necessities  of  war,  and  to  hoard  up  treasures  beforehand 
as  the  instruments  either  of  conquest  or  of  defense,  without 
trusting  to  extraordinary  imposts,  much  less  to  borrowing  in 
times  of  disorder  and  confusion.  The  Athenians  are  said  to 
have  amassed  upward  of  10,000  talents  in  the  interval  be- 
ween  the  Persian  and  the  Peloponnesian  wars,  and  the  Lace- 
daemonians imitated  their  example.  A  large  treasure,  part 
of  which  had  been  stored  up  from  the  age  of  Cyrus,  fell  into 
the  hands  of  Alexander  the  Great  on  the  conquest  of  Susa 
and  Ecbatana.  In  the  Roman  commonwealth  the  aurum 
vicesimarium,  or  tax  of  the  twentieth  penny  on  the  manu- 
mission of  slaves,  was  accumulated,  along  with  various  sums 
taken  from  subjugated  states,  in  the  Temple  of  Saturn,  as 
a  sacred  deposit  to  be  used  only  in  the  utmost  emergency. 
On  leaving  Italy,  Pompey  was  weak  enough,  or  careless 
enough,  to  leave  this  treasure  behind  him,  which,  in  conse- 
quence, became  the  prey  of  his  less  scrupulous  or  more 
vigilant  rival.  At  a  subsequent  period,  Augustus,  Tiberius, 
Yespasian,  and  all  the  more  able  emperors,  were  in  the  habit 
of  accumulating  treasure.  Paulus  -^milius  brought  a  large 
amount  of  gold  and  silver  to  Home,  which  is,  however,  ad- 
mitted to  have  been  a  part  only  of  the  wealth  of  the  Kings 
of  Macedon,  Perseus  having  previously  dissipated  a  consid- 
erable portion  in  his  wars  with  the  Romans.  The  practice, 
in  fact,  was  universal  in  the  ancient  world."  ^ 

The  conditions  under  which  ancient  peoples  lived,  and 
their  conception  of  the  purpose  for  which  states  were  organ- 
ized, may,  perhaps,  secure  for  this  policy  of  war-reserves,  as 
practiced  by  them,  some  faltering  words  of  commendation; 

1  McCuUoch,  "  Taxation  and  the  Funding  System,"  p.  396. 


WHEN  MAY  STATES  BORROW  MONEY?  87 

but  when  one  takes  into  view  the  wider  range  of  duties  now 
imposed  upon  governments,  the  changed  methods  of  war- 
fare, and  especially  the  complexity  of  modern  industrial  re- 
lations, he  is  forced  to  conclude  that  the  maintenance  of  this 
old  theory  of  treasury  management  is  without  defense.  Gov- 
ernments of  to-day  can  not  be  guided  alone  by  their  military 
interests,  for  the  state  is  more  than  a  military  organization. 

Three  important  interests  are  endangered  by  maintaining 
any  considerable  war-reserve.  Such  a  policy  works  against 
self-government ;  it  leads  to  industrial  confusion ;  it  embar- 
rasses sound  financial  administration.  Constitutionalism  op- 
poses this  policy,  because  the  possession  of  a  large  sum  of 
money  makes  an  administration  independent  of  the  people, 
and  renders  it  possible  for  a  government  to  commit  the  coun- 
try to  a  line  of  action  in  which  there  is  no  popular  interest. 
It  is  no  answer  to  this  criticism  for  one  to  say  that  a  reserve 
fund  can  not  be  sufficiently  large  to  carry  an  important  enter- 
prise to  completion,  and  that  the  government  must  at  last 
make  its  constitutional  appeal  to  the  people  for  financial  sup- 
port. Control  must  be  exercised  by  the  people  at  the  begin- 
ning of  an  enterprise  or  not  at  all.  When  war  has  been  once 
entered  upon,  and  the  first  blood  shed,  the  administration 
may  use  that  intangible  something  called  national  honor  to 
whip  a  reluctant  people  into  the  support  of  an  offensive 
policy.  The  essence  of  our  criticism  is,  that  preparation  of 
this  sort  against  emergencies  renders  popular  control  over 
public  policy  inoperative,  just  at  the  time  when  it  is  impera- 
tive that  such  control  should  be  exercised. 

So  far  as  industries  are  concerned,  the  effect  of  a  reserve 
fund  depends  largely  upon  the  manner  in  which  the  fund 
is  accumulated,  upon  its  management  while  maintained,  and 
upon  the  method  of  its  expenditure  when  that  becomes  ne- 
cessary. If  obtained  through  conquest,  or  as  an  indemnity 
from  a  foreign  country,  it  will  not  immediately  affect  indus- 
trial activity.  If  during  its  maintenance  it  be  kept  in  the 
form  of  specie,  and,  when  invested,  it  be  thrown  upon  a 
foreign  market,  one  can  with  difficulty  trace  its  influence 


88  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

in  domestic  business  affairs.  Or,  to  go  one  step  further,  if 
a  specie  reserve  be  spent  at  home,  while  a  country  is  accom^ 
modating  itself  to  belligerent  conditions,  it  may  render  some 
positive  assistance.  This  is  easily  explained.  At  the  out- 
break of  a  war,  it  is  usually  desirable  that  industrial  activity 
should  be  quickened.  This  may  be  done  by  adding  to  the 
country's  circulating  medium,  so  as  to  give  a  slight  upward 
impulse  to  the  market.  The  objection  to  securing  this  result 
by  an  issue  of  legal-tender  paper  is,  that  pennanent  values 
would  be  thereby  disturbed,  and  the  ultimate  effects  of  the 
measure  would  be  injurious.  This  does  not  hold  against  an 
addition  to  circulation  in  the  form  of  specie,  for  such  an  in- 
crease could  effect  no  inflation  of  prices.  In  case  the  coun- 
try could  not  absorb  the  additional  amount  of  money,  it 
would  be  drained  to  foreign  countries  through  increased 
importations.  There  is,  then,  but  little  difference  between 
this  method  of  disposing  of  a  fund  of  reserved  specie,  and 
its  direct  expenditure  by  the  government  upon  a  foreign 
market,  except  that  its  flow  through  the  hands  of  domestic 
commerce  may  have  assisted  in  that  reorganization  of  indus- 
tries always  necessary  when  a  people  enters  upon  a  war. 

It  is  feared,  however,  that  these  considerations  are  a  little 
fanciful.  They  assume  the  fund  to  have  cost  nothing,  that 
it  is  composed  of  specie,  and  that  the  country  loses  nothing 
during  a  period  of  peace  on  account  of  the  fact  that  the  fund 
is  idle.  If  it  be  necessary  to  accumulate  this  fund  through 
taxation,  the  case  is  different  from  the  beginning.  There  is 
an  old  financial  maxim  which  says  that  it  is  better  for  money 
to  fructify  in  the  pockets  of  the  people  than  to  lie  idle  in 
the  coffers  of  the  state.  As  an  accurate  statement,  this  is, 
of  course,  open  to  criticism.  Money  will  fnictify  in  the 
pockets  of  the  people  no  more  than  in  the  chest  of  the  state. 
Money  of  itself  will  fructify  nowhere ;  it  has  no  vital  princi- 
ple. It  is  merely  a  machine,  an  industrial  instrument.  Yet 
the  maxim  expresses  a  truth,  for  it  means  that  capital  is  lost 
to  the  people  who  tie  their  money  up  in  war-reserves ;  and 
the  profit  or  increase  on  that  capital — being  the  added  eflB- 


WHEN  MAT  STATES  BORROW  MONEY?  89 

ciency  to  labor  which  the  possession  of  capital  gives — is  also 
lost.  It  shows  an  entire  misapprehension  of  the  point  to  say 
that  the  fund  may  be  employed  by  the  government  as  applied 
capital,  for,  when  so  employed,  it  fails  to  serve  the  purpose 
of  a  reserve  fund.  It  must,  therefore,  be  regarded  as  unwise 
for  any  government  to  embarrass  the  industries  of  its  sub- 
jects in  order  to  establish  a  useless  fund.  ISTor  is  it  necessary 
as  a  military  measure  to  make  such  provision  against  emer- 
gencies. The  true  war-reserve  for  any  people  consists  in  a 
healthy  state  of  their  industries.  Under  such  conditions 
there  will  always  be  a  large  fund  of  free  capital,  and  a  gov- 
ernment which  has  maintained  its  credit  above  reproach, 
entering  upon  a  policy  approved  by  the  country  at  large, 
can  avail  itself  of  this  fund  through  loans  as  easily  and  as 
quickly  as  it  could  relieve  its  necessities  by  turning  the  great 
key  of  a  war-chest. 

Bat,  again,  may  this  preparation  for  the  exigencies  of 
war  be  defended  as  a  financial  measure — does  it  harmonize 
with  the  claims  of  the  financial  interest?  For  answering 
this  question,  we  must  first  learn  the  kind  of  values  placed 
in  the  reserve  fund,  to  what  extent  they  are  immediately 
available,  and  what  deficits  in  ordinary  expenditures  will  be 
uncovered  as  the  result  of  their  disposal.  These  values  may 
be  of  three  sorts  :  specie,  paper  of  foreign  governments,  and 
industrial  securities.  The  securities,  it  is  fair  to  assume, 
will  be  for  the  most  part  of  domestic  origin.  The  composi- 
tion of  the  reserve  fund  of  Prussia,  which  in  1876  amounted 
to  8111,000,000,  was  as  follows  :  It  embraced  $30,000,000  in 
specie,  $16,000,000  in  foreign  interest-bearing  paper,  and 
$65,500,000  in  railroad  securities.  Xow  to  the  extent  of  the 
metallic  reserve  the  government  certainly  has  an  available 
fund,  and,  as  it  bears  no  interest,  and  so  can  have  no  service 
depending  on  it,  its  apphcation  at  the  outbreak  of  war  would 
create  no  deficit  in  ordinary  expenditures ;  but  so  enormous 
are  the  financial  demands  in  modern  warfare,  that  nothmg 
could  be  done  with  so  small  an  amount.  What  are  830,- 
000,000  in  the  prosecution  of  a  great  war?     The  sum  is 


90  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

just  large  enougli  to  set  an  enterprise  on  foot,  and  commit 
the  people  to  some  policy  in  which  they  may  have  no  inter- 
est. It  is  futile  to  talk  of  collecting  enough  specie  in  time 
of  peace  to  evade  the  burden  of  taxes  when  an  outbreak 
shall  occur.  The  minister  of  finance  should,  of  all  men,  be 
the  most  strenuous  against  such  a  measure,  for,  by  the  collec- 
tion of  this  fund,  capital  is  unnecessarily  exported  in  order 
to  recover,  for  the  purpose  of  circulation,  eo  much  specie 
as  the  government  had  taken  up ;  industries  are  thereby 
weakened,  and  the  country  is  thus  rendered  less  able  to  bear 
the  stress  of  a  strong  financial  policy  than  if  it  had  been  left 
unencumbered  by  the  tax. 

But  the  full  absurdity  of  this  policy  appears  only  when 
one  considers  the  fund  as  composed  of  interest-bearing  se- 
curities ;  for  a  slight  analysis  will  show  that,  as  a  matter  of 
fact,  so  far  as  industries,  taxes,  and  general  financial  manage- 
ment are  concerned,  there  is  no  difference  between  a  sale  of 
these  securities  and  the  placement  of  new  bonds.  In  the 
fii'st  place,  the  source  from  which  the  government  draws  its 
capital  would  in  either  case  be  the  same.  The  securities 
placed  upon  the  market  must  be  absorbed  by  the  country's 
fund  of  free  capital ;  that  is  to  say,  by  the  same  fund  to 
which  appeal  would  be  made  through  an  issue  of  new 
bonds.  Whatever  industrial  consequences,  therefore,  would 
follow  the  direct  borrowing  of  a  certain  amount  of  capital, 
must  make  their  appearance  when  an  equal  amount  of  capi- 
tal is  diverted  from  its  accustomed  line  of  investment  by 
the  sale  of  securities.  IS'or,  in  the  second  place,  will  the 
sale  of  interest-bearing  securities  obviate  the  necessity  of 
levying  new  taxes.  It  will  probably  be  the  case  that  the  in- 
come arising  from  this  fund  constitutes  a  permanent  appro- 
priation for  the  support  of  some  peace  service,  as,  for  exam- 
ple, pensions,  military  schools,  invalid  funds,  sailors'  homes, 
and  the  like.  Such  demands  do  not  cease  because  the  coun- 
try has  entered  upon  a  war,  yet  the  ordinary  revenue  devoted 
to  their  support  is  cut  off  by  the  depletion  of  the  war-chest. 
The  government  is  under  the  necessity  of  making  good  this 


WHEN  MAY  STATES  BORROW  MONEY?  9I 

deficit  in  its  ordinary  income.  What,  then,  is  the  difference 
whether  taxes  are  levied  for  this  purpose  or  for  paying  inter- 
est upon  newly-created  bonds  ?  The  only  financial  question 
involved  has  to  do  with  the  most  economical  method  of 
employing  the  proceeds  of  these  new  taxes — whether  their 
sale  in  the  form  of  an  annuity  will  bring  a  larger  amount 
of  ready  cash  than  the  sale  of  securities  held.  For  such  a 
question  there  can,  of  course,  be  no  general  answer,  but  the 
probability  is  that  strong  governments,  enjoying  the  reputa- 
tion of  honest  dealings,  will  find  it  to  their  advantage  to 
place  new  bonds. 

It  seems,  then,  proper  to  conclude  that,  when  an  emer- 
gency arises,  the  financial  problem  is  not  at  all  simplified  by 
the  possession  of  a  large  fund  of  negotiable  securities.  In- 
deed, in  one  particular  is  this  problem  rendered  more  diffi- 
cult. New  taxes  never  work  well,  unless  the  people  who 
pay  them  feel  their  necessity.  The  friction  occasioned  by 
complaint  is  a  serious  matter  to  the  tax-collector.  Now,  if 
the  administration  start  with  an  empty  treasury  and  borrow 
money,  there  can  be  no  question  in  the  popular  mind  respect- 
ing the  necessity  of  the  taxes,  if  only  the  purpose  of  the 
government  be  approved.  The  need  of  additional  revenue 
is  the  same  in  the  other  case,  but  this  will  not  be  clearly 
seen  if  it  be  known  that  the  government  has  a  war-chest; 
and,  in  consequence,  the  newly-levied  taxes  will  have  greater 
obstacles  to  overcome.  Thus  not  only  are  the  industries  of 
the  country  less  able  to  bear  taxes  than  if  no  capital  had  been 
unnecessarily  taken  during  times  of  peace,  but  an  appeal  to 
those  industries  for  revenue  is  rendered  unnecessarily  diffi- 
cult by  the  presence  of  a  war-chest. 

The  criticisms  here  presented  would  in  part  disappear 
should  the  reserve  fund  be  composed  of  values  that  could  be 
quickly  disposed  of  upon  foreign  markets ;  that  is  to  say,  so 
much  of  the  criticism  as  arises  from  the  fact  that  the  sale  of 
securities  at  home  depletes  the  fund  of  which  the  financier 
desires  to  avail  himself  by  other  means.  It  is  probably  true 
that,  by  sending  bonds  back  to  the  people  from  whom  they 


92  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

originally  came,  a  government  may  realize  more  than  if  it 
endeavored  to  place  its  own  paper  upon  the  same  foreign 
market ;  for,  other  things  being  equal,  government  paper  is 
always  highest  upon  the  market  where  it  is  issued.  Such  a 
consideration,  however,  extends  no  further  than  to  suggest 
the  sort  of  paper  that  should  be  employed  if  a  government 
has  determined  to  establish  a  war-reserve. 

But  it  may  be  said  that  preparation  for  war  in  time  of 
peace  does  away  with  the  necessity  of  paying  a  debt  when 
war  shall  have  been  brought  to  a  close.  In  so  far  as  extraor- 
dinary expenditures  may  be  paid  out  of  the  war-chest,  tliis 
is  true;  but  it  is  not  a  final  statement  of  the  case.  The 
question  under  discussion  holds  in  view  the  advisability  of 
war-reserves  as  a  permanent  policy,  and  if  the  reserve  fund 
is  for  any  cause  depleted,  the  maintenance  of  the  policy  re- 
quires it  to  be  again  filled  when  the  emergency  shall  have 
passed.  There  is,  therefore,  no  difference,  so  far  as  the  ulti- 
mate burden  upon  the  people  is  concerned,  whether  the  ex- 
traordinary expenditure  be  borne  by  the  reserve  or  be  met 
by  an  appeal  to  credit ;  in  either  case,  a  necessity  is  imposed 
upon  the  government  of  levying  special  taxes  in  order  to 
recover  its  ante-bellum  financial  position.  It  is  the  most 
superficial  of  all  thoughts  that  a  war-chest  obviates  the  neces- 
sity of  war  taxes. 

But  again  it  may  be  asked :  Why  can  not  this  fund,  so 
far  as  it  is  composed  of  interest-bearing  securities,  be  made 
to  accumulate  independently  of  taxes,  by  applying  its  annual 
earnings  to  the  purchase  of  new  securities'^  It  would,  I 
think,  be  difficult  to  frame  a  question  that  suggests  a  larger 
number  of  financial  errors  than  this;  but  for  our  present 
purpose  it  will  be  suflBcient  to  call  attention  to  its  funda- 
mental misconception.  The  question  implies  that  the  state 
possesses  an  interest  independent  of  the  interest  of  the  peo- 
ple. This  is  not  true.  The  state  has  no  purpose  in  becom- 
ing a  wealthy  corporation.  The  first  rule  laid  down  by  the 
science  of  finance  is,  that  the  demands  of  the  government 
for  money  shall  never  exceed  the  amount  necessary  to  per- 


WHEN  MAY  STATES  BORROW  MONEY?         93 

form  with  economy  those  duties  imposed  upon  it.  Should  a 
government,  however,  possess  a  productive  fund,  the  proceeds 
of  which  might  be  appropriated  to  necessary  expenditures, 
but,  instead  of  so  using  it,  permit  the  fund  to  compound 
out  of  its  own  earnings,  while  other  services  are  supported 
through  taxation,  the  practical  result  would  be  the  same  as 
though  the  fund  grew  from  the  proceeds  of  taxes.  The  very 
assumption  is  erroneous  upon  which  the  question  is  based, 
and  all  that  was  said  above  respecting  the  establishment  of 
a  reserve  fund  by  taxation  applies  equally  to  its  accumulation 
by  compound  purchases. 

"We  can  not,  then,  in  view  of  all  that  has  been  said,  evade 
the  conclusion  that  war-reserves  are  contrary  to  sound  finan- 
cial policy  among  commercial  peoples.  The  true  war-chest 
is  a  healthy  state  of  industries,  and  the  key  for  opening  this 
chest  is  unblemished  credit.  If  there  is  no  other  means  of 
providing  against  unforeseen  emergencies,  a  sudden  and  im- 
perative demand  upon  the  public  treasury  must  be  accepted 
as  ample  defense  for  the  employment  of  public  credit. 

But  what  may  be  said  of  the  English  method  of  provid- 
ing against  an  emergency  ?  In  theory  this  method,  which 
maintains  some  particular  tax  at  a  low  rate  in  ordinary  times, 
satisfies  all  the  varying  demands  of  a  sound  financial  policy. 
It  recognizes  that  industries  should  be  freed  so  far  as  possible 
from  all  restraints ;  that  a  new  tax  can  not  be  immediately 
productive ;  and  that  arbitrary  modifications  of  existing  taxes 
must  endanger  continuous  revenue.  It  must  be  admitted 
that  the  method  here  considered,  and  which  we  have  termed 
the  English  method,  is  found  in  books  rather  than  in  prac- 
tice, for  it  has  never  been  followed  with  that  strictness  which 
gives  it  the  sanction  of  a  well-defined  custom.  As  presented 
in  the  course  of  discussions,  it  is  as  follows  :  The  machinery 
for  collecting  the  income  tax,  it  is  urged,  should  be  always 
kept  in  good  working  order,  and  the  amount  collected  in 
times  of  peace  should  be  small.  "With  such  a  provision  a 
fiscal  emergency  may  be  met  by  simply  raising  the  rate. 
That  is  to  say,  this  policy  establishes  a  war-chest  whose  funds 


94  PUBLIC   BORROWING  AS  A  FINANCIAL  POLICY. 

are  deposited  witli  tlie  people,  and  assigns  a  particular  tax 
to  serve  as  its  key. 

In  illustration  of  the  manner  in  which  the  income  tax  is 
used,  we  may  refer  to  Mr.  Gladstone's  administration  of  it 
during  the  Crimean  war.  In  1852  this  tax  was  7tZ.  in  the 
pound  on  incomes  of  £150  and  upward.  In  1853  incomes 
between  £100  and  £150  were  brought  under  the  operation 
of  the  tax  at  the  rate  of  5cZ.  in  the  pound,  and  the  tax 
was  extended  to  Ireland.  In  1851  this  tax  was  doubled  to 
make  headway  against  war  expenses ;  and  in  1855  the  rate 
was  again  raised  to  I*.  4:d.  and  \s.  lid.  in  the  pound,  re- 
spectively, for  the  two  grades  of  incomes.  This  rate  was 
retained  through  the  year  1856,  but  in  1857  and  1858  the 
tax  was  reduced,  so  that  it  finally  stood  at  f>d.  in  the  pound 
for  all  incomes  above  £100.  It  should  be  said,  in  this  con- 
nection, that  Mr.  Gladstone  desired  to  carry  through  the 
Crimean  war  without  an  appeal  to  loans.  This  he  did  not 
succeed  in  doing,  but  he  did  succeed,  by  his  management  of 
the  income  tax,  in  relieving  to  a  great  degree  the  credit  of 
the  country.^ 

There  can  be  no  doubt  but  this  method  of  preparing  for 
war  in  time  of  peace  is  superior  in  every  pai-ticular  to  the 
policy  of  estabUshing  a  war-chest ;  but  it  is  by  no  means  cer- 
tain that,  in  a  well-ordered  financial  system,  the  income  tax 
may  not  be  put  to  better  use.  If  any  particular  tax  must 
be  subjected  to  sudden  and  unexpected  changes  in  the  rates 
imposed,  it  is  wise  to  select  the  tax  upon  incomes  for  that 
purpose,  for  personal  consumption  will  alone  be  affected  by 
the  change.  According  to  my  own  views,  however,  this  tax 
is  an  essential  part  of  a  well-formulated  financial  system,  and 
should  be  regarded  as  a  source  of  permanent  revenue.  We 
are  then  led  to  inquire  if  no  other  method  of  providing 
against  sudden  emergencies  may  be  devised.  The  only 
method  coming  into  competition  with  this,  regarded  by  finan- 

*  The  principles  underlying  this  policy  were  recognized  by  Alexander  Hamil- 
ton, and  this  explains  his  desire  to  establish  internal  duties.  He  clearly  per- 
ceived that  import  duties  could  not  be  relied  upon  in  time  of  war. 


WHEN  MAY  STATES  BORROW  MONEY?        95 

ciers  as  worthy  of  consideration,  is  the  one  that  looks  for  relief 
in  the  employment  of  temporary  loans.  It  lies  in  the  pur- 
pose of  this  jDolicy  to  establish  a  system  of  taxation  so  broad 
that  it  may  furnish  adequate  supplies  for  ordinary  demands 
while  yet  the  rate  imposed  shall  be  below  the  maximum  rate. 
In  case  of  fiscal  emergency,  this  rate  must  be  gradually  raised, 
bat  the  stress  of  the  first  demand  may  be  met  l)y  temporary 
loans.  The  details  of  this  policy  are  fully  presented  in  a  sub- 
sequent chapter  upon  the  financial  management  of  a  war. 

Our  study,  then,  respecting  exigency  loans  leads  us  to 
acquiese  in  their  necessity,  since  it  appears  that  any  adequate 
preparation  on  the  part  of  the  state  against  sudden  demands 
is  less  defensible  than  a  resort  to  credit  at  the  time  the  de- 
mands shall  arise.  The  best  preparation  for  war  is  the  crea- 
tion of  a  large  fund  of  free  capital  in  the  community,  and 
the  most  economical  means  for  the  government  to  secure 
control  over  this  fund,  upon  the  advent  of  an  emergency,  is 
through  the  placement  of  public  bonds.  "We  may,  therefore, 
deliberately,  and  after  due  consideration,  adopt  the  policy  of 
public  debts  as  an  essential  part  of  a  good  financial  adminis- 
tration. It  is  true  that  dangerous  tendencies  are  bound  up 
in  deficit  financiering.  A  highly  organized  mechanism 
always  brings  with  it  the  possibility  of  disaster.  A  national 
debt  is  a  national  evil.  But  he  would  be  rash  indeed  who, 
for  such  a  reason,  would  close  this  source  of  revenue,  for 
such  a  decision  must  entail  yet  greater  evils  by  forcing  gov- 
ernments to  adopt  other  and  more  injurious  methods  of 
securing  money. 

Loans  may  he  used  to  supply  the  fiscal  demands  arising 
from  public  works. 

It  remains  yet  to  consider  another  plea  for  the  employ- 
ment of  public  credit.  The  necessity  of  loans  arises,  in  the 
third  place,  from  a  determination  on  the  part  of  the  govern- 
ment to  enter  upon  some  great  work  of  public  improvement. 
One  may  say  that  this  plea  has  no  interest  for  the  people  of 
the  United  States,  because  neither  the  Federal  Government 


96  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

nor  the  governments  of  the  various  States  are  in  the  habit  of 
undertaking  cntei-prises  of  such  magnitude  that  loans  are 
found  desirable.  It  is  true  that  the  policy  with  which  the 
people  of  this  country  are  familiar  differs  somewhat  from  that 
followed  by  continental  governments.  In  France  and  Ger- 
many it  is  regarded  as  part  of  the  proper  functions  of  go\^- 
ernment  to  provide  those  public  improvements  in  which  all 
subjects  are  alike  interested.  Still,  it  is  a  superficial  view 
of  prevalent  tendencies  to  conclude  that  this  question  is  of 
no  importance  to  American  readers.  For,  in  the  first  place, 
the  query  Is  sure  to  arise,  sooner  or  later,  if  the  States  were 
justified  in  abandoning  to  private  corporations  that  direct 
control  over  internal  commerce  which  they  once  possessed. 
The  advisability  of  constitutional  limitations  which  exclude 
the  States  as  sovereign  corporations  from  the  administration 
of  internal  improvements  is  by  no  means  a  settled  question. 
But,  in  the  second  place,  the  defense  which  is  here  urged 
for  public  borrowing  is  of  paramount  importance  when  one 
turns  his  attention  to  local  financiering.  The  crowding  of 
our  cities  brings  ever  more  prominently  into  view  the  neces- 
sity of  adequate  provision  for  sanitary  regulations,  for  educa- 
tion, for  street  transportation,  and  the  like.  It  is  not  safe 
to  leave  these  matters  in  the  hands  of  private  corporations, 
and,  so  far  as  the  local  authorities  are  obliged  to  take  them 
up,  the  functions  of  the  local  treasury  must  be  extended. 
People  are  coming  to  admit,  for  example,  that  private  gas 
companies  are  a  fraud ;  that  their  corrupt  management  ex- 
ceeds the  corruption  of  city  officials.  They  are  coming  to 
see  that  a  corporation  which  enjoys  a  monopoly  in  the  sup- 
ply of  any  necessary  of  life,  and  places  its  charges  above  the 
cost  of  rendering  the  service,  is  guilty  of  a  breach  of  public 
trust.  'Now,  it  is  but  a  step  from  the  recognition  of  this  fact 
to  the  conclusion  that  the  pubHc  interest  demands  an  exten- 
sion rather  than  a  curtailment  of  municipal  functions,  and 
that  the  problems  presented  by  dense  populations  are  to  be 
solved  by  attending  to  the  science  of  government,  rather  than 
by  denying  to  municipal  authorities  a  right  to  perform  those 


WHEN  MAY  STATES  BORROW  MONET?  97 

functions  which  common  interest  demands.  This  means  that 
cities  may  properly  consider  the  advisability  of  entering  upon 
schemes  of  internal  improvement.  One  may  not,  therefore, 
say  that  this  argument  in  favor  of  deficit  financiering  has  no 
pertinency  for  American  readers. 

Suppose  a  government,  of  any  grade  whatever,  becomes 
convinced  that  an  extensive  system  of  public  improvements 
is  a  necessity,  does  it  thereby  decide  in  favor  of  creating  a 
public  debt  ?  This  question  can  not  be  answered  until  we 
have  learned  what  other  methods  of  securing  the  required 
capital  are  open  to  the  administration.  The  real  point  of 
inquiry  is  this  :  "Whether  the  enterprises  determined  upon 
can  be  as  economically  carried  through  by  any  other  means 
as  by  the  placement  of  improvement  bonds. 

The  necessity  of  a  debt  might  be  obviated  were  it  possi- 
ble to  proceed  slowly  with  the  work,  expending  ag  much 
each  year  as  the  ordinary  revenue  allows,  and,  that  amount 
being  exhausted,  to  stop  all  work  until  additional  funds 
•  accumulate.  There,  indeed,  are  some  sorts  of  improvements 
to  which  this  method  of  procedure  would  not  be  detrimental, 
but  no  engineer  could  for  a  moment  defend  it  as  a  general 
rule.  Most  undertakings  will  not  bear  delay  without  dam- 
age to  that  part  of  the  work  already  done.  Thus,  a  house 
half  built,  and  left  to  stand  the  exposure  of  a  hard  winter, 
will  require  a  month's  work  in  the  spring  to  repair  weather 
damages.  The  same  is  true,  only  in  a  more  marked  degree, 
of  dock-building,  dredging,  the  making  of  levees,  canals,  or 
railroads.  Indeed,  there  are  few  exceptions  to  the  statement 
that  continued  application  of  new  capital  is  needed  to  save 
the  capital  already  apj^lied  ;  from  which  it  follows  that 
small  annual  appropriations,  for  the  purpose  of  carrying 
through  a  great  undertaking,  come  under  the  severe  con- 
demnation of  engineering  rules.  It  is  essential  that  sufii- 
cient  control  over  capital  should  be  secured  at  the  beginning 
to  insure  the  completion  of  the  work  without  interruption. 

Again,  the  government  might  levy  and  collect  an  extraor- 
dinary tax,  equal  to  the  estimated  cost  of  the  entire  enter- 


98  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

prise ;  this  would  satisfy  the  demand  of  the  engineer,  and  at 
the  same  time  obviate  the  necessity  of  an  appeal  to  public 
credit.  The  chief  objection  to  this  plan  lies  in  the  fact  that 
it  disregards  certain  well-established  principles  of  taxation. 
It  contravenes  the  fundamental  rule  of  finance  that  a  revenue 
system  should  be  stable.  Taxes  are  a  most  important  ele- 
ment in  what  may  be  termed  the  industrial  environment, 
and  for  that  reason  should  not  be  subjected  to  sudden  and 
arbitrary  changes.  Such  changes  introduce  unnecessary  dis- 
turbances into  business  relations,  and  prove  a  benefit  to 
speculators  only,  whose  gains  are  always  dishonest.  It  makes 
no  difference  whether  rates  go  up  or  down,  in  either  case 
the  modification  of  usual  relations  introduces  unreliable  fac- 
tors into  business  calculations.  For  this  reason  a  loan  which 
may  be  repaid  during  a  series  of  years  is  much  more  eco- 
nomical than  a  single  tax  to  the  entire  amount  demanded. 
The  justification  of  a  loan,  also,  under  the  conditions  as- 
sumed, is  the  same  for  a  state  as  for  an  individual.  It  is 
more  convenient  to  pay  by  installments  than  to  make  head- 
way against  large  expenditures  by  a  single  tax ;  for  a  great 
expenditure  met  within  the  year  entails  upon  the  commu- 
nity not  only  the  burden  of  the  payment,  but  the  unnecessary 
burden  of  disturbance  and  inconvenience.  The  same  princi- 
ple that  leads  men  of  ordinary  means  to  approve  of  loan  and 
building  associations,  commends  the  borrowing  system  to  the 
best  interests  of  an  industrial  community. 

It  may  be  further  remarked  that  the  avoidance  of  a  loan 
by  means  of  the  levy  of  an  excessive  tax  is  apparent  rather 
than  real,  for,  with  the  exception  of  a  small  amount  that 
may  be  met  by  saving  in  personal  expenditures,  this  tax 
must  in  the  first  instance  be  paid  out  of  employed  capital. 
But  employed  capital  can  not  be  reduced  without  decreasing 
the  output,  and  in  consequence  the  ultimate  result  will  be 
that  each  industrial  manager  will  borrow  again  sufficient 
capital  to  cover  the  deficit  occasioned  by  the  payment  of  his 
tax.  In  tracing  out  the  consequences  of  this  measure,  it  must 
not  be  overlooked  that  the  general  demand  in  the  commu- 


WHEN  MAY  STATES  BORROW  MONEY?  99 

nitj  for  ordinary  goods  is  not  decreased  in  any  marked  de- 
gree by  the  action  of  the  government;  hence  industries 
must  keep  up  to  their  normal  degree  of  intensity.  It  thus 
appears  that  this  excessive  and  unusual  tax  has  caused  the 
creation  of  a  debt  in  the  community  equal  to  part  if  not  all 
of  the  sum  collected  by  the  state.  This  method,  therefore, 
of  avoiding  the  incumbrance  of  obligations,  resting  ulti- 
mately upon  the  industries  of  the  country,  does  not  accom- 
plish that  which  is  claimed  for  it.  In  the  case  of  a  public 
loan,  there  is  a  single  debtor — the  government — and  a  thou- 
sand creditors  who  were  previously  owners  of  free  capital ; 
in  the  case  of  a  tax,  there  are  a  thousand  debtors — those  who 
paid  the  tax  out  of  their  employed  capital — and  the  same 
creditors  as  before.  It  thus  appears  that  the  financial  ques- 
tion involved  pertains  to  the  form  of  a  debt  which  must  in 
any  instance  be  created,  and  reduces  itself  to  this :  Can  the 
administration  procure  capital  upon  easier  terms  than  a  pri- 
vate corporation  ?  Now  it  is  well  known  that,  in  the  absence 
of  ^ny  unusual  and  peculiar  influences,  the  credit  of  a  state 
stands  higher  than  the  credit  of  private  corporations  within 
the  state.  There  are  many  instances  in  which  this  relation 
is  reversed,  but  the  statement  is  a  general  truth ;  and,  if  all 
governing  bodies  would  be  honest  in  their  dealings  and  fol- 
low strict  rules  of  finance,  it  would  become  a  universal 
truth.  "We  are  then  forced  to  concede  that  the  capital  neces- 
sary to  carry  on  any  great  public  work  may  be  more  eco- 
nomically procured  through  loans  than  by  means  of  a  single 
tax. 

The  foregoing  discussion  leads  us  to  recognize  that  public 
credit  may  be  advantageously  employed  to  cover  running 
deficits,  to  assist  in  meeting  sudden  and  unforeseen  emergen- 
cies, and  to  provide  revenue  for  carrying  on  public  improve- 
ments. It  has,  however,  made  no  distinction  between  the 
sovereign  and  the  corporate  duties  imposed  upon  govern- 
ments, nor  has  it  attempted  to  classify  debts  according  to  the 
nature  of  the  service  for  which  they  are  created.  Such  a 
distinction  is  necessary  for  further  analysis,  because  a  gov- 


100  PUBLIC  BORROWING  AS  A  FINANCIAL  POLICY. 

ernment  always  finds  that  its  rules  for  administration  are 
shaped  by  the  duties  it  is  called  upon  to  perform.  When, 
for  example,  the  subjects  of  a  state  must  be  protected  from 
foreign  invasion,  the  government  exercises  functions  essen- 
tially sovereign,  and  the  principles  to  which  all  its  decisions 
should  conform  are  of  a  sovereign  character.  The  Depart- 
ment of  Treasury,  like  the  Department  of  War,  feels  the 
imperative  character  of  the  situation,  and  freely  adopts 
methods  of  coercion  which,  under  ordinary  circumstances, 
could  not  be  defended.  It  follows  from  this  that  the  rules 
for  the  administration  of  a  war-debt  are  shaped,  in  a  large 
degree,  by  the  attitude  of  sovereignty  which  the  financier  is 
obliged  to  assume. 

On  the  other  hand,  a  debt  contracted  for  some  industrial 
purpose  does  not  so  manifestly  rest  upon  the  exercise  of  sov- 
ereign power.  In  this  case  the  activity  of  the  state  is  more 
nearly  akin  to  that  of  a  private  corporation,  and  the  rules  to 
which  it  should  conform  are  in  some  degree  rules  of  corporate 
management.  It  is  true  that  public  bonds  always  rest  on  the 
power  to  tax,  and  that  this  power  is  essentially  a  sovereign 
power,  so  that,  whether  a  debt  be  contracted  for  the  purpose 
of  war  or  for  public  improvements,  it  must  be  the  act  of  a 
body  exercising  sovereign  powers.  It  is  also  admitted  that 
there  are  difficulties  in  maintaining  this  distinction.  But, 
notwithstanding  these  concessions,  it  is  yet  believed  that  a 
failure  to  notice  the  various  pui-poses  for  which  debts  are 
created,  and  the  modification  in  the  rules  of  management 
thus  imposed,  is  responsible  for  much  of  that  confusion  ob- 
served in  the  administration  of  public  treasuries.  It  is  for 
this  reason  that  I  have  thought  best  to  accept  the  distinction 
here  suggested  as  the  basis  of  classification  for  further  study. 
In  the  chapters  that  immediately  follow,  making  up  Part  II 
of  this  essay,  will  be  undertaken  a  discussion  of  those  tech- 
nical questions  that  arise  in  connection  with  ^N'ational  Deficit 
Financiering,  the  expression  being  used  in  the  American 
rather  than  in  the  European  sense.  In  contrast  with  this. 
Part  III  will  be  devoted  to  a  consideration  of  the  exercise  of 


WHEX  MAY  STATES  BORROW  MONEY?  IQl 

the  power  to  make  loans  for  corporate  rather  than  sovereign 
purposes,  and  will  embrace  a  discussion  of  Local  Deficit 
Financiering.  This  part  will  include  a  study  of  the  manage- 
ment of  public  debts  bj  the  States  and  by  the  minor  civil 
divisions. 


PART    II. 


NATIONAL   DEFICIT  FINANCIERING. 


PAKT   II. 

JSTATIOT^AL  DEFICIT  Fi:RA]srCIEEI^G. 


CHAPTER  I. 

rmAITCIAL   MANAGEMENT    OF    A   WAR. 

The  prosecution  of  a  war  of  such  magnitude  as  to  call 
for  large  expenditure  of  money,  imposes  upon  the  minister 
of  finance  the  duty  of  adopting  a  policy  for  the  management 
of  the  public  treasury.  Under  modern  industrial  conditionSj 
however,  his  choice  is  quite  restricted,  for  there  are  but  three 
proposals  which  it  is  worth  his  while  to  consider.  These 
proposals  are  as  follows : 

1.  The  entire  war  expenditure  may  be  drawn  from  newly- 
levied  taxes.  In  the  administration  of  this  policy  the  only 
loans  required  are  loans  in  anticipation  of  tax  receipts,  in 
order  to  cover  the  demands  upon  the  treasury  during  the 
period  in  which  the  new  revenue  system  is  becoming  opera- 
tive. 

2.  The  entire  expenditure  of  the  war  may  be  met  from 
the  proceeds  of  loans.  In  this  case  there  is  a  call  for  new 
taxes  equal  to  the  interest  upon  the  loans  contracted.  Some- 
times even  interest  payments  are  met  by  selling  new  bonds, 
but  this  is  so  manifestly  at  variance  with  sound  rules  of 
finance  that  it  need  not  be  considered. 

3.  The  extraordinary  expenditure  entailed  by  the  war 
may  come  from  a  reasonable  union  of  these  two  sources  of 
revenue — loans   and   taxes.      The   important    question   pre- 


106  NATIONAL  DEFICIT  FINANCIERING. 

sented  by  this  policy  pertains,  of  course,  to  the  nature  of  the 
union  proposed,  and  to  the  ratio  of  proceeds  by  loans  to  pro- 
ceeds from  taxes ;  and  it  is  further  necessary  to  inquire  if 
this  ratio  is  the  same  for  all  stages  of  the  war. 

It  must  be  remembered  throughout  the  investigation,  in 
this  manner  laid  before  us,  that  our  problem  has  primarily 
to  do  with  extraordinary  expenditure — that  is  to  say,  with 
expenditure  over  and  above  the  demands  of  peace.  Nor 
does  this  properly  present  the  extent  of  the  treasury  problem. 
It  is  more  than  likely  that  some  of  the  ordinary  sources  of 
revenue  will  be  cut  off  by  a  state  of  war,  so  that  new  ways 
of  securing  money  must  be  opened  to  cover  the  deficits  in 
permanent  demands.  An  adequate  financial  policy,  there- 
fore, must  be  more  than  sufficient  to  make  headway  against 
war  expenditures. 

Shall  the  entire  extraordinary  expenditure  entailed  hy  a 
war  he  met  hy  an  exercise  of  the  taxing  power  ? 

This  question  brings  us  at  once  into  the  presence  of  a 
claim  respecting  which  there  is  great  diversity  of  opinion. 
There  are  those  who  assume,  without  proof  or  argument,  that 
a  people  engaged  in  an  exhaustive  conflict  are  unable  to  bear 
any  marked  increase  in  taxation  so  long  as  the  conflict  shall 
continue.  There  are  others  who,  stopping  short  of  this  ex- 
treme claim,  yet  urge  it  as  highly  desirable  that  the  burden 
of  a  war  should  be  distributed  over  several  generations. 
From  such  premises  the  adoption  of  the  loan  policy  must 
logically  follow.  As  opposed  to  such  opinions,  there  are 
writers  of  respectability  and  standing  in  finance  who  deny 
the  inability  of  a  people  to  meet  within  the  year  all  neces- 
sary expenditures,  and  who  refuse  assent  to  the  time-honored 
argument  that  by  a  loan  the  burden  of  a  war  may  be  dis- 
tributed. Such  writers  claim  that  the  generation  engaged 
in  the  contest  must  bear  the  burden  of  its  expense  ;  that  this 
burden  can  in  no  manner  be  bequeathed ;  but  that,  if  the 
war  entail  a  debt  upon  the  following  generations,  its  burden 
is  bom  twice — once  by  the  fathers  who  furnished  the  capital 
that  was  destroyed,  and  once  by  the  sons  who  funished  the 


FINANCUL  MANAGEMENT  OF  A  WAR.  107 

money  to  expunge  the  debt.  Although  this  latter  conception 
of  war  expenditure  does  not  appear  to  me  to  be  quite  accu- 
rate, it  is  yet  based  upon  the  manifest  truth  that  each  gen- 
eration must  subsist  upon  the  product  of  its  own  industry. 
ISTo  father  can  eat  the  potatoes  to  be  hoed  by  an  unborn  son, 
nor  can  an  army  live  on  bread  to  be  delivered,  at  the  option 
of  the  baker,  between  ten  and  forty  years  from  the  date  of 
the  contract.  It  is  thus  the  production  of  the  past  and  the 
present,  and  not  that  of  the  present  and  the  future,  which 
furnishes  the  required  capital  for  a  war. 

Such  a  statement  of  truisms,  however,  is  no  final  argu- 
ment in  favor  of  the  taxing  policy,  nor  does  it  meet  fairly 
the  claim  of  those  who  say  that  by  means  of  loans  the  burden 
of  a  conflict  may  in  part  be  thi'own  upon  posterity.  They 
who  claim  that  war  expenditure  should  be  entirely  met  from 
the  proceeds  of  taxes  fail  to  recognize  two  very  important 
facts.  In  the  first  place,  they  fail  to  understand  the  differ- 
ence between  capital  expended  in  a  war  and  the  burden  en- 
tailed upon  the  citizens  of  a  country  by  a  war.  The  con- 
sumption of  capital  may  or  may  not  give  rise  to  the  con- 
sciousness of  extraordinary  expenditure  on  the  part  of  the 
state,  according  as  it  does  or  does  not  effect  involuntary 
privation.  The  real  burden  of  a  war  consists  in  the  fact  that 
men  are  deprived  of  property  without  the  compensation  of 
hope.  In  the  second  place — and  here  lies  the  kernel  of  the 
argument — they  fail  to  perceive  that  the  most  important 
factor  for  the  financier  is  not  the  material  but  the  psycho- 
logical factor.  It  stands  as  a  first  principle  in  an  adequate 
war  policy  that,  however  great  may  be  the  demand  for  a  cur- 
rent year,  it  should  be  met  in  such  a  manner  that  the  source 
from  which  supply  is  drawn  may  never  be  exhausted.  The 
appeal  of  the  financier  to  the  industrial  producers  should  be 
made  in  such  alluring  language  that,  while  continually  giving 
of  their  product  to  the  state,  their  energy  will  never  be  slack- 
ened. The  fund  of  current  product,  from  which  all  revenue 
is  drawn,  should  be  as  unfailing  as  the  widow's  cruse  of  oil. 

It  may  appear  at  first  glance  that  the  realization  of  this 


108  NATIONAL  DEFICIT  FINANCIERING. 

principle  in  actual  treasury  management  is  impossible ;  but 
it  is  perfectly  feasible,  provided  only  a  proper  financial  policy 
be  adopted.  It  is  an  error  to  suppose  that  current  consump- 
tion in  time  of  war  is  largely  increased  over  average  con- 
sumption in  time  of  peace.  Public  consumption  may  be 
greater,  but  private  expenditure  is  curtailed.  Unless  mer- 
cenaries are  brought  from  abroad,  no  more  of  the  necessaries 
of  life  are  required  than  before  the  mobilization  of  the  army, 
and  on  the  average  such  as  are  consumed  will  be  of  no  better 
quality.  To  balance  the  increase  of  capital  required  for  the 
manufacture  of  arms,  powder,  ships,  and  the  like,  there  is  a 
decrease  in  the  rapidity  with  which  capital  is  invested  in 
forms  adapted  to  peace  employments.  It  is,  however,  neces- 
sary to  notice  that  average  production  can  only  be  maintained 
by  unusual  exertion  on  the  part  of  non-belligerents,  for  the 
ranks  of  peace  workers  ^vill  have  been  depleted  by  enlist- 
ments in  the  army.  This  call  for  increased  activity  is,  in 
reality,  the  first  tax  sustained  by  those  who  continue  to  fol- 
low the  common  pursuits  of  life.  But  this  tax  need  not  be 
the  occasion  of  solicitude,  for  common  habit  may  be  relied 
upon  to  tide  over  this  first  draft  of  men  from  the  industrial 
ranks.  A  farmer  who,  with  three  sons,  has  been  accustomed 
to  cultivate  a  section  of  land,  will  not  permit  a  hundred  and 
sixty  acres  to  lie  fallow  because  one  of  his  sons  has  joined  the 
army.  It  is  a  truth  of  quite  general  application  that  men  are 
disinclined  to  fall  below  a  standard  once  achieved  ;  and  it  is 
upon  the  principle  of  human  nature  which  this  truth  dis- 
closes that  the  financier  may  rely  for-  the  maintenance  of 
average  production,  notwithstanding  the  reduction  in  labor- 
ing force. 

The  real  question  that  confronts  the  financier  is  the  fol- 
lowing :  Can  he  expect  this  increased  activity  will  be  main- 
tained if,  in  addition  to  the  labor-tax,  he  levy  a  money-tax 
equal  to  the  entire  expense  of  supporting  the  army  ?  To 
answer  this  question  in  the  negative  is  not  to  deny  whatever 
is  true  in  the  claim  that  taxes  tend  to  quicken  production. 
A  tax  levied  for  that  purpose  must  gradually  and  persistently, 


FINANCIAL  MANAGEMENT  OF  A  WAR.  IQQ 

and  tlirougli  a  long  series  of  years,  raise  the  rate  wliicli  it 
imposes ;  the  desired  result  would  not  follow  should  indus- 
tries be  subjected  without  warning  to  excessive  charges.  For 
example,  is  it  reasonable  to  believe  that  the  industry  of  the 
K'orthern  States  would  have  been  rendered  more  intense  if  the 
total  expenditure  of  1862  had  been  met  by  taxation  ?  The 
expenditure  of  that  year  was  equal  to  one  quarter  of  the  total 
national  product,  while  the  extraordinary  war  expenditure 
was  equal  to  one  fifth  of  such  product.  Assuming  that  newly 
levied  taxes  might  have  secured  the  money  for  1862,  can  one 
suppose  that  the  year  1865,  when  war  expenditure  amounted 
to  twenty-seven  per  cent  of  gross  product,  would  have  fur- 
nished an  adequate  amount  of  disposable  capital  ?  Ko  one 
who  understands  the  psychology  of  taxation  can  for  a  mo- 
ment admit  such  a  claim.  A  tax  so  excessive  in  amount, 
precipitated  without  warning  upon  established  industries, 
would  have  encroached  upon  working  profit,  weakened  the 
incentive  to  labor,  broken  the  mainspring  of  activity,  and 
destroyed  the  mechanism  of  production.  It  would,  therefore, 
have  disregarded  the  first  principle  of  treasury  management, 
for  it  would  have  dried  up  the  source  from  which  all  revenue 
must  come.  An  adequate  policy  for  the  conduct  of  a  war 
must  be  able  to  carry  a  people  through  to  the  end,  and  not 
expose  them  to  the  danger  of  a  stranded  treasury  in  the  midst 
of  conflict. 

If,  on  the  other  hand,  a  part  of  the  extraordinary  ex- 
penditure should  be  met  by  an  appeal  to  credit,  the  loans 
would  be  largely  absorbed  by  free  capital.  This  would  cause 
no  derangement  of  existing  industries,  and  the  saving  in  this 
manner  secured  would  be  voluntary  saving.  The  idea  of 
loss  would  not  attend  the  payment  of  capital  to  the  state,  but 
rather  the  thought  of  establishing  a  jDermanent  income  would 
induce  to  renewed  activity.  The  administration,  therefore, 
would  run  no  risk  of  exhausting  the  fund  from  which  future 
revenue  might  be  secured,  for  it  would  be  continuously  re- 
plenished by  willing  hands.  It  is  altogether  by  the  mark  to 
say  that  loans  must  in  the  end  be  paid  from  the  proceeds  of 


110  NATIONAL  DEFICIT  FINANCIERING. 

taxes,  and  that,  in  consequence,  the  advantage  of  an  appeal 
to  credit  is  apparent  rather  than  real.  The  question  is, 
whether  the  desire  to  avoid  taxes  in  the  future  will  induce 
men  to  suffer  the  burden  of  present  payments.  If  they 
truthfully  declare  such  willingness,  there  can  be  no  necessity 
of  resorting  to  credit.  But  if,  as  an  analysis  of  character 
declares,  the  potency  of  motives  is  inversely  as  the  remote- 
ness of  interests  concerned,  this  abstract  truth,  that  taxes 
must  finally  equal  the  sums  borrowed,  can  not  be  relied  upon 
to  induce  men  to  practice  self-restraint  in  consumption,  or  to 
undergo  severe  toil  in  production.  It  is  such  considerations 
as  these  that  lead  us  to  regard  the  taxing  policy  as  inadequate 
to  the  demand  of  an  exhaustive  war. 

Shall  the  extraordinary  expenditure  imposed  hy  a  war  he 
covered  entirely  hy  the  proceeds  of  loans  ? 

The  policy  which  is  here  brought  to  view  has  been  a 
favorite  one  with  many  financiers.  The  general  claim  in 
its  favor  is  that,  while  a  people  are  engaged  in  war,  their 
industries  should  be  freed  from  all  unnecessary  incumbrances, 
in  order  that  they  may  supply  the  "  extra  product "  which 
the  "  extra  consumption  of  the  government "  demands.  The 
conclusion  of  such  reasoning  is  that,  while  a  war  lasts,  no- 
new  taxes  should  be  imposed. 

It  has  been  already  observed,  in  the  foregoing  discussion, 
that  the  conception  here  presented  is  erroneous.  The  con- 
sumption of  a  people  engaged  in  war  is  not  greatly  in  excess 
of  peace  consumption.  It  may,  if  necessary,  be  brought 
down  to  less  than  peace  consumption.  An  adequate  finan- 
cial policy  demands  only  that  average  production  should  be 
maintained.  It  is  true  that  average  production  calls  for 
more  intense  application  on  the  part  of  non-belligerents,  but, 
if  business  men  are  not  discouraged  by  an  erroneous  financial 
policy,  the  industrial  habits  of  the  people  may  be  relied  upon 
to  attain  this  end.  Indeed,  the  administration  may  reason- 
ably hope  that  a  certain  amount  of  taxes  will  be  willingly 
paid,  in  addition  to  what  was  termed  above  the  labor-tax. 
The  motive  or  force  which  the  financier  must  call  into  play 


FINANCIAL  MANAGEMENT  OF  A  WAR.  m 

to  secure  so  desirable  an  end  is  patriotism.  It*  the  purpose 
of  the  government  be  fully  appreciated  and  approved,  a  free 
peoj)le  will  gladly  undergo  extensive  sacrifices  in  order  to 
carry  out  an  adopted  policy.  It  is  a  recognized  fact  that  self- 
governing  peoples  are  stronger  for  tax  purposes  than  the  sub- 
jects of  a  monarchical  state,  for  their  will  lies  more  closely 
to  the  heart  of  the  state.  But  the  administration  of  a  self- 
governing  people  should  never  undertake  a  war  in  favor  of 
which  there  is  no  strong  sentiment.  As  things  go,  then,  in 
democratic  countries,  it  does  not  appear  that  loans  to  the  full 
extent  of  extraordinary  demands  are  necessary,  and  there  is 
no  question  as  to  the  superiority  of  taxes  over  loans  when 
their  use  will  not  curtail  industrial  energy.  The  measure  of 
this  first  money-tax  should  be  the  popular  enthusiasm  for 
the  war. 

"What,  however,  is  the  specific  argument  against  the  policy 
of  securing  the  entire  war  revenue  from  loans  ?  Many  con- 
siderations might  be  presented  showing  the  dangers  that 
beset  this  method  of  financiering,  but  a  study  of  certain  at- 
tempted realizations  of  it  may,  perhaps,  disclose  its  inade- 
quacy the  most  clearly.  There  are  very  few  cases  in  which 
a  struggle  of  any  magnitude,  testing  at  all  a  people's  financial 
resources,  has  been  carried  to  a  successful  issue  on  the  basis  of 
a  loan  policy ;  while  there  are  many  instances  of  an  abandon- 
ment of  this  policy  during  the  progress  of  a  war,  which  itself 
must  be  accepted  as  confession  of  failure.  Twice  in  the  his- 
tory of  our  own  country  has  this  fatal  overconfidence  in  the 
sufficiency  of  public  credit  brought  a  rich  and  energetic  peo- 
ple to  feel  the  stress  of  money  demands,  and  to  experience 
the  evils  of  ruinous  and  expensive  methods  of  treasury  con- 
trol. It  is  not  true  that  the  actual  failure  of  any  policy 
proves  the  impossibility  of  its  success ;  but  it  is  true  that  a 
careful  study  of  several  failures  will  permit  one  to  decide 
whether  continued  ill-success  is  due  to  inadequate  manage- 
ment or  to  erroneous  principles  in  the  policy  itself.  Under- 
standing, then,  the  limitations  rightfully  placed  upon  all 
arguments  from  history,  let  us  turn  our  attention  to  the 


112  NATIONAL   DEFICIT  FINANCIERING. 

financial  conduct  of  the  two  great  wars  in  which  the  United 
States  has  been  engaged— that  of  1812  and  that  of  1861. 

The  financial  policy  which  was  adopted  for  the  conduct 
of  the  war  of  1812  finds  its  first  statement  in  the  treasury 
report  of  1807.  Tliis  has  been  called  the  war-report  of 
Albert  Gallatin.  The  reason  why  so  astute  a  politician  forced 
this  question  thus  early  upon  the  attention  of  Congress  may 
not,  perhaps,  with  clearness  be  determined ;  it  is  sufficient 
for  our  present  purpose  to  notice  the  fact.  The  financial 
condition  of  the  treasury  at  this  time  was  as  follows :  The 
permanent  revenue  of  the  country  was  estimated  at  $14,500,- 
000,  while  the  permanent  expenditure  for  peace  purposes 
was  estimated  at  $11,000,000.  In  tliis  expenditure,  however, 
there  was  included  an  annual  payment  on  account  of  the 
debt -service  of  $8,000,000,  which  would  be  reduced  to 
$3,400,000  after  1808,  because  of  the  inabiHty  of  the  gov- 
ernment to  proceed  as  rapidly  as  heretofore  in  the  expunge- 
ment of  the  debt.  Taking  this  into  the  account,  the  perma- 
nent expenditures  on  a  peace  basis  could  not  exceed  $7,000,- 
000,  and  this  would  provide  a  permanent  annual  surplus  of 
$7,500,000 

It  was  in  the  presence  of  such  financial  prospects  that 
the  Secretary  spoke  his  views  on  the  proper  method  of  treas- 
ury administration  in  the  event  of  a  commercial  war.  His 
plan  may  be  the  best  presented  in  his  own  words,  which  are 
as  follows : 

That  the  revenue  of  the  United  States  will,  in  subsequent 
years,  be  considerably  impaired  by  a  war,  neither  can  or  ought 
to  be  concealed.  It  is,  on  the  contrary,  necessary,  in  order  to 
prepare  for  the  crisis,  to  take  an  early  view  of  the  subject,  and 
to  examine  the  resources  which  should  be  selected  for  supplying 
the  deficiency  and  defraying  the  extraordinary  expenses. 

There  are  no  data  from  which  the  extent  of  the  defalca- 
tion can  at  this  moment  be  calculated,  or  even  estimated.  It 
will  be  sufficient  to  state — 1.  That  it  appears  necessary  to  pro- 
vide a  revenue  at  least  equal  to  the  annual  expenses  on  a  peace 
establishment,  the  interest  of  the  existing  debt,  and  the  inter- 
est on  the  loans  which  may  be  raised.  2.  That  those  expenses, 
together  with  the  interest  of  the  debt,  will,  after  the  year  1808, 


FINANCIAL  MANAGEMENT  OF  A  WAR,  113 

amount  to  a  sum  less  than  17,000,000  ;  and,  therefore,  if  the 
present  revenue  of  $14,500,000  shall  not  be  diminished  more 
than  one  half  by  a  war,  it  will  still  be  adequate  to  that  object, 
leaving  only  the  interest  of  war-loans  to  be  provided  for. 

Whether  taxes  should  be  raised  to  a  greater  amount,  or 
loans  be  altogether  relied  on  for  defraying  the  expenses  of  the 
war,  is  the  next  subject  of  consideration. 

Taxes  are  paid  by  the  great  mass  of  the  citizens,  and  im- 
mediately affect  almost  every  individual  in  the  community. 
Loans  are  supplied  by  capitals  previously  supplied  by  a  few 
individuals.  In  a  country  where  the  resources  of  the  individ- 
uals are  not  generally  and  materially  affected  by  the  war,  it  is 
practicable  and  wise  to  raise  by  taxes  the  greater  part,  at  least, 
of  the  annual  supplies.  The  credit  of  a  nation  may  also,  from 
various  circumstances,  be  at  times  so  far  impaired  as  to  leave 
no  resource  but  taxation.  In  both  respects  the  situation  of  the 
United  States  is  totally  dissimilar. 

There  is  no  question  but  that  the  Secretary  here  expresses 
full  confidence  in  the  adequacy  of  the  loan  policy  to  meet 
the  financial  stress  of  a  war.  It  is  true  that  he  suggests  the 
levy  of  certain  new  taxes,  but  their  purpose  is  "to  provide 
for  the  interest  of  war-loans,  and  to  cover  deficiencies  in  case 
the  existing  revenue  should  fall  below  seven  millions  of  dol- 
lars." He  does  not  contemplate  taxation  as  a  means  of  de- 
fraying war  expenditure. 

A  clearer  statement  of  this  policy  is  to  be  found  in  the 
report  of  1S08 : 

No  internal  taxes  [says  the  Secretary],  either  direct  or  in- 
direct, are  therefore  contemplated,  even  in  the  case  of  hos- 
tilities carried  against  the  two  great  belligerent  powers. 

And  the  report  of  1809  comes  back  again  to  the  same 
thought : 

Loans  reimbursable  by  installments,  at  fixed  periods,  after 
the  return  of  peace,  must  constitute  the  principal  resources  for 
defraying  the  extraordinary  expenses  of  the  war. 

So  far,  then,  there  can  be  no  question  as  to  Mr.  Galla- 
tin's views  respecting  the  financial  conduct  of  a  war ;  but 
the  impression  has  somehow  arisen  that  the  events  of  the 
years  1810  and  1811  caused  him  to  modify  the  opinions 


114  NATIONAL  DEFICIT  FINANCIEBING. 

whicli  he  had  previously  expressed,  and  to  urge  upon  Con- 
gress the  adoption  of  taxes  to  a  degree  wholly  at  variance 
with  his  original  plan.^  There  is,  however,  no  evidence 
which  warrants  one  in  the  belief  that  the  Secretary  had  aban- 
doned the  theory  of  loan  financiering;  but,  on  the  other 
hand,  in  a  letter  of  January,  10,  1812,  addressed  to  the 
chairman  of  the  Committee  of  Ways  and  Means,  there  may 
be  found  a  restatement  of  the  loan  policy,  perfect  in  every 
essential  particular.  It  is  true  that  the  committee  was  recom- 
mended to  urge  the  establishment  of  both  direct  and  indirect 
taxes,  but  this  was  due  to  the  fact  that  customs  revenue 
had  fallen  below  the  estimates  of  peace  demands.  These 
taxes,  therefore,  could  not  with  propriety  be  termed  "war- 
taxes,"  since  their  proceeds  were  to  be  devoted  to  cover  peace 
expenditure. 

It  may  be  proper  to  repeat  [wrote  Mr.  Gallatin]  that  bo 
long  as  the  public  credit  is  preserved  and  a  sufficient  revenue 
is  provided,  no  doubts  are  entertained  of  the  possibility  of  pro- 
curing, on  loan,  the  suras  wanted  to  defray  the  extraordinary 
expenses  of  a  war,  and  that  the  apprehensions  expressed  relate 
solely  to  the  terms  of  the  loans,  to  the  rate  of  interest  at  which 
they  can  be  obtained.* 

Again,  in  another  place,  he  says  :  "  In  proportion  as  the 
ability  to  borrow  is  diminished,  the  necessity  of  resorting  to 
taxation  is  increased."  Such  a  sentence  as  this  could  not 
have  been  written  except  by  one  who  had  turned  his  back 
squarely  upon  the  policy  of  war  taxation.  It  regards  taxes 
as  a  last  resort,  to  be  employed  only  when  the  public  credit 
shall  have  been  exhausted ;  the  tax  policy,  on  the  other 
hand,  holds  loans  in  reserve  to  be  used  only  in  presence  of 
the  greatest  stress. 

But  did  the  views  of  Congress  coincide  with  those  of  the 
Secretary  ?  In  one  particular  only  do  we  find  them  at  vari- 
ance. Mr.  Gallatin  desired  the  new  loans  to  rest  upon  a 
permanent  revenue  sufficient  to  pay  current  interest,  but  the 

»  Cf.  Adams's  "  Life  of  Gallatin,"  pp.  450-455. 
'  "Writings  of  Gallatin,"  vol.  i,  p.  514. 


FINANCIAL  MANAGEMENT   OF  A  WAR.  115 

members  of  Congress  had  no  sucli  view  of  this  necessity  as 
to  lead  them  to  press  to  legalization  the  necessary  bills.  It 
was  decided  by  the  Committee  of  "Ways  and  Means  that  a 
war  of  four  years'  duration  could  be  carried  on  for  $50,- 
000,000,  and  in  February,  1812,  a  loan  of  $11,000,000  was 
authorized  as  the  sum  needed  for  the  first  year.  Upon  the 
same  day  that  the  House  passed  the  loan  bill,  Mr.  Bacon, 
chairman  of  the  Committee  of  Ways  and  Means,  made  a 
report  in  which  he  advocated  "  war-taxes,"  setting  forth  in  a 
clear  manner  the  policy  of  the  administration.  This  com- 
mittee was  as  yet  under  the  control  of  Mr.  Gallatin.  The 
speech  which  attended  this  report  is  peculiar,  showing  as  it 
does  the  excessive  and  absurd  confidence  which  the  extreme 
war  party  had  in  war-loans.  After  stating  that  a  loan  of  $11,- 
000,000  was  regarded  as  sufficient  for  the  first  year,  he  said : 

It  is  assumed  by  the  committee  that  extraordinary  or  war 
expenditure  of  the  two  succeeding  years  shall  also  rest  upon 
further  loans  ;  and  it  is  supposed  that  revenue  sufficient  to  pay 
only  the  ordinary  expenses  and  the  interest  on  the  old  debt 
and  on  new  loans  shall  be  immediately  provided  for  by  the 
government.^ 

That  which  is  peculiar  in  Mr.  Bacon's  speech  is  his  warn- 
ing to  Congress  against  relying  upon  the  proceeds  of  loans 
to  pay  the  interest  upon  debts  contracted. 

If  we  suffer  ourselves  [he  said]  to  yield  to  the  new  the- 
ory of  borrowing  both  principal  and  interest,  we  have  no  data 
by  which  to  judge  upon  what  probable  terms  loans  may  be 
obtained  at  all,  or  how  long  it  will  be  before  we  must  wind  up 
business.^ 

Still  the  temper  of  the  House  called  for  just  such  argu- 
ments, for  there  was  a  strong  faction  that  held  taxes  for  the 
payment  of  current  interest  to  be  superfluous.  "  How  are 
the  exigencies  of  the  government  for  the  next  year  to  be 
supplied?"  exclaimed  Mr.  Cheeves,  who  was  spokesman  for 
this  faction.     "  Is  the  deficiency  to  be  derived  from  taxes  ? 

'  "  Annals  of  Congress,"  for  Twelfth  Congress,  1st  Session,  col.  1095. 
*  "  Annals  of  Congress,"  for  Twelfth  Congress,  Ist  Session,  col.  1098. 


116  NATIONAL  DEFICIT  FINANCIERING. 

ISTo,  I  will  tell  gentlemen  who  are  opposed  to  them,  for  their 
comfort,  that  there  will  be  no  taxes  imposed  for  the  next 
year."  And  yet  in  the  expenditures  for  the  next  year  it  was 
necessary  to  include  the  interest  upon  loans  already  voted. 
There  can  be  no  question  but  that  the  financial  policy 
adopted  at  the  beginning  of  the  war  of  1812  looked  to 
credit,  rather  than  taxes,  as  the  source  of  all  extraordinary 
expenditure.^  Let  us  then  inquire  respecting  the  results  of 
this  endeavor  to  realize  the  loan  policy. 

It  is  not  my  purpose  to  trace  in  detail  the  course  of 
financial  management  of  the  war  of  1812.  All  that  is 
essential  to  the  end  held  in  view  may  be  succinctly  pre- 
sented by  a  few  comments  upon  the  two  tables  that  follow. 
In  these  tables  will  be  found  certain  facts  pertaining  to  the 
employment  of  public  credit,  whether  in  the  form  of  direct 
loans  or  of  an  issue  of  treasury  notes  ;  the  amounts  author- 
ized by  the  several  acts,  the  amounts  issued,  and  the  condi- 
tions of  their  sale,  will  show  quite  clearly  the  degree  of  suc- 
cess that  attended  the  administration  of  the  loan  policy.  It 
is  necessary  to  observe  that  war  was  declared  upon  June  18, 
1812,  and  that  the  news  of  a  definite  treaty  of  peace  arrived 
in  New  York  upon  February  13,  1815.  The  period  covered 
by  the  tables,  therefore,  pertains  to  those  financial  measures 
considered  by  Congress  in  view  of  a  continuance  of  the  war,  as 
well  as  to  the  employment  of  public  credit  for  war  purposes. 

^  It  is  indeed  amusing  to  notice  the  spleen  with  which  the  extreme  war 
party  opposed  even  the  moderate  proposals  of  Mr.  Bacon  for  taxation.  "  At 
the  last  session,"  exclaimed  Mr.  Wright,  of  Maryland,  "  when  the  question  for 
rechartering  the  odious  British  bank  was  before  us,  we  had  to  encounter  the  in- 
fluence of  the  Secretary  of  the  Treasury.  .  .  .  Now,  at  this  session,  he  has  told 
us  that,  if  we  had  a  national  bank,  we  should  have  no  occasion  to  resort  to  in- 
ternal taxes  ;  thereby  calling  the  American  people  to  review  the  conduct  of  their 
representatives  in  not  continuing  that  bank,  and  thereby  to  fix  the  odium  of 
these  odious  taxes  on  the  National  Legislature.  Now  a  system  of  taxes  is  pre- 
sented  truly  odious,  in  my  opinion,  to  the  people,  to  disgust  them  with  their  rep- 
resentatives and  to  chill  the  war  spirit.  .  .  .  Sir,  is  there  anything  of  originality 
in  his  [Mr.  Gallatin's]  system  ?  No !  it  is  treading  in  the  muddy  footsteps  of 
his  official  predecessors,  in  attempting  to  strap  around  the  necks  of  the  people 
this  odious  system  of  taxation,"  etc. 


FIXANCLili  MANAGEMENT  OF  A  WAR. 


117 


Table  A. — Showing  loans  authorized,  and  the  facts  concern- 
ing their  sale,  for  the  loar  of  1812. 


Eate 

Date  of  loans 

Amounts 

Amounts 

Eate  of 

Eate  of 

of  sale 

authorized. 

authoi-ized. 

issued. 

interest. 

sale. 

on  gold 
basis. 

March  14,  1812 

$11,000,000 

$10,284,700.00 

Q% 

par. 

par. 

February  8,  1818... . 

16,000,000 

18,109,377.43 

&% 

88 

88 

August  2,  1813 

7,500,000 

8,498,581.95 

G% 

88i 

88i 

(  9,919,476.25 

G% 

80 

80 

March  24,  1814 

25,000,000 

\   5,384,138.87 

&% 

80 

70 

(      746,403.31 

6% 

80-95 

65-69 

November  15,1814.. 

3,000,000 

1  1,450,000.00 

Gfc,    1% 

par. 

81-89 

January  9,  1815 

6,000,000 

200,000.00 

Q% 

par. 

89 

Table  B. — Showing  treasury  notes  authorized,  and  the  facts 
concerning  their  sale,  for  the  loar  of  1812. 


Date  of  acta  authorizing 
Treasury  notes. 

Amounts 
authorized. 

Amounts 
issued. 

Eate  of 
interest 

Eate  of 
sale. 

Eate 

of  sale 

estimated 

on  gold 

basis. 

^  ^June  30,  1812 

February  25,  1813... 

March  4,  1814 

December  26,  1814.. 
February  24,  1815.. . 

$5,000,000 
5,000,000 
10,000,000 
10,500,000 
25,000,000 

$5,000,000 
5,000,000 

10,000,000 
8,318,400 

17,432,780 

6J^,  7^ 

par. 
par. 
par. 
par. 
100-104 

par. 

par. 
84-91 
86-90 
82-90 

One  of  the  most  significant  facts  which  a  comparison  of 
these  two  tables  presents,  is  the  relation  that  seems  to  exist 
between  loans  and  treasury  notes.  As  the  power  of  Con- 
gress to  secure  money  by  the  sale  of  bonds  decreased,  reli- 
ance upon  treasury  notes  increased.  The  inability  of  the 
government  to  place  bonds  was  recognized  in  the  latter  part 
of  1814 :  in  December  of  that  year  and  February  the  year 
following,  $35,500,000  of  treasury  notes  were  authorized. 
Turning  now  to  a  consideration  of  the  loans  proper,  the  rec- 
ord of  events  shows  that  the  first  loan  met  with  no  enthu- 
siasm. Although  $11,000,000  had  been  authorized,  and  the 
Secretary  was  anxious  that  subscriptions  should  be  rapid  and 

'  No  stock  was  actually  issued,  but  this  sum  was  borrowed  from  the  banks. 
9 


118  NATIOXAL  DEFICIT  FINANCIERING. 

sufficient  to  absorb  tlie  entire  sum,  he  found  at  the  end  of 
two  months  that  only  $6,000,000  of  the  stock  had  been  sub- 
scribed. Mr.  Gallatin  admitted  that  the  success  of  the  loan 
was  "  more  tlian  doubtful,"  and  it  was  because  of  the  tardy 
sale  of  bonds  that  Congress  authorized  the  first  issue  of 
treasury  notes.  It  is  true  that  the  terms  of  this  first  loan 
were  not  attractive,  and  that  the  greatest  enthusiasm  for  the 
war  was  found  outside  the  moneyed  classes  ;  but  one  must 
not  lose  sight  of  the  fact  that  the  only  new  taxes  levied  for 
the  support  of  this  loan  consisted  in  a  slight  alteration  of 
tonnage  rates  and  a  tardy  increase  of  customs  duties.  The 
financial  policy  upon  which  this  war  was  to  be  carried 
through  appears  to  have  shown  signs  of  weakness  before  the 
struggle  had  been  fairly  begun. 

On  February  8th,  the  following  year,  the  government 
again  came  upon  the  market  for  money,  this  time  demand- 
ing $16,000,000.  The  weakness  of  the  previous  loan  was 
charged  to  the  fact  that  too  strict  conditions  had  been  im- 
posed upon  the  administration  in  its  negotiations  ;  in  this 
loan,  therefore,  as  in  all  subsequent  loans,  the  only  condi- 
tion insisted  on  by  Congress  was  the  right  of  reimbursement 
after  a  specified  term  of  years.  The  passage  of  this  act 
elicited  much  discussion,  concerning  both  the  propriety  of 
the  war  and  the  adequacy  of  the  financial  policy.  Some  few 
members  saw  that  loans  resting  on  good  intentions  only 
must  lead  to  disaster. 

In  finance  [said  one  member]  the  wisdom  of  man  has 
never  been  able  to  discover  any  effectual  security  to  public 
credit  short  of  certain  funds  or  revenue  pledged  for  the  re- 
demption, and  sufficiently  productive  to  pay  at  least  the  inter- 
est, of  the  debt.-' 

Oddly  enough,  Steuart  on  "  Political  (Economy "  was 
quoted  in  support  of  this  common-sense  remark.  But  com- 
mon sense  does  not  seem  to  have  been  regarded  at  this  time 
as  essential  to  the  guidance  of  the  nation's  finances,  and  no 

»  "  Annals  of  Congress,"  for  Twelfth  Congress,  2d  session,  col.  896. 


FINANCIAL  MANAGEMENT  OF  A  WAR.  119 

steps  were  taken  toward  an  increase  of  taxation.  This  loan 
was  placed  at  eighty-eight  cents  on  the  dollar,  while  press- 
ing demands  were  met  by  an  additional  issue  of  $5,000,000 
in  treasury  notes. 

Still  there  are  many  expressions  which  show  that  Con- 
gress was  beginning  to  suspect  the  inadequacy  of  the  loan 
policy,  and  at  an  extra  session,  called  in  May,  1813,  steps 
were  taken  toward  laying  the  foundation  of  a  system  of  in- 
ternal revenue.  But  it  would  be  an  error  to  suppose  that 
the  original  loan  policy  was  at  this  time  abandoned.  Con- 
gress had  now  reached  the  position  defined  in  Gallatin's 
financial  reports,  and  recognized  the  necessity  of  providing 
some  basis  for  the  credit  of  the  state.  There  is  but  the 
slightest  suggestion  in  the  report  of  Mr.  Jones,  who  was 
then  acting  as  Secretary  of  the  Treasury,  which  looked  to 
the  employment  of  taxes  for  making  headway  against  war 
demands.  According  to  his  view,  the  chief  benefit  of  new 
taxes  would  accrue  in  enabling  the  government  to  carry  out 
its  loan  policy. 

As  reliance  [be  says]  must  be  had  upon  a  loan,  for  the 
war  expenses  of  the  year  1814,  the  laying  of  the  internal  taxes 
may  be  considered,  with  a  view  to  that  object,  as  essentially 
necessary  :  in  the  first  place,  to  facilitate  the  obtaining  of  the 
loan  ;  and  secondly,  for  procuring  it  on  favorable  terms. 

From  the  message  of  the  President,  also,  may  one  learn 
that  the  difiiculty  of  negotiating  bonds  at  par  was  regarded 
as  the  only  justification  of  new  taxes.  The  revenue  system, 
as  adopted,  included  a  direct  tax  upon  the  several  States,  and 
internal  duties  of  various  sorts.  They  were  called  "war- 
taxes,"  and,  by  the  act  that  authorized  them,  were  limited 
to  one  year  from  the  conclusion  of  a  treaty  of  peace.  The 
adoption  of  this  system,  however,  appears  to  have  had  little 
influence  upon  public  credit,  partly  because  the  new  source 
of  revenue  could  not  be  relied  upon  for  at  least  a  year,  but 
more  especially  because  the  new  taxes  were  temporary,  and 
not  co-existent  with  the  debts  assigned  to  them. 

This  plan  of  carrying  on  the  war  by  the  proceeds  of  loans 


120  NATIONAL  DEFICIT  FINANCIERING. 

may  be  said  to  have  broken  down  in  connection  witb  tlie 
$25,000,000  loan  of  1814.  To  measure  adequately  the  mag- 
nitude of  this  operation,  it  must  be  taken  in  connection  with 
the  $10,000,000  of  treasury  notes  authorized  about  the  same 
time,  from  which  it  appears  that  $35,000,000  of  debt  were 
created  by  Congress  to  cover  the  appropriations  of  a  single 
sitting.  This  was  a  sum  equal  to  live  times  the  average 
peace  expenditure,  and  to  the  total  ante  l)ellum  revenue  for 
two  and  a  half  years ;  and  it  was  thought  that  this  sum  might 
safely  rest  upon  the  modest  appeal  to  tax  contributions  just 
mentioned. 

There  is  one  element  of  complication  that  must  not  be 
overlooked,  if  the  danger  and  uncertainty  which  attended 
the  financial  operations  of  this  period  are  to  be  clearly  per- 
ceived. Mr.  Gallatin  had  relied  largely  for  the  success  of 
his  plan,  as  presented  in  1807,  upon  the  assistance  of  the 
United  States  Bank.  He  thought  to  control  the  circulating 
medium  of  the  country  by  means  of  this  institution,  and  to 
procure  from  it  much  assistance  in  the  placement  of  public 
bonds.  !Nor  can  it  be  doubted  that  Congress,  in  refusing  to 
grant  a  renewal  of  the  charter  of  the  bank,  is  largely  re- 
sponsible for  the  financial  straits  into  which  the  government 
fell.  The  increase  in  the  circulation  of  the  private  banks 
brought  with  it  the  evils  of  inflation,  even  before  the  suspen- 
sion of  specie  payments,  which  occurred  in  August  and  Sep- 
tember, 1814.  Some  conception  of  the  difficulty  of  carrying 
through  any  financial  operation  may  be  gained  when  one 
learns  that  the  government  was  obhged  to  select  ninety-four 
State  banks  as  the  depositories  of  its  funds ;  and,  so  various 
were  the  kinds  of  paper  money  in  use,  that  it  was  found 
necessary  to  keep  four  separate  ledger  accounts  in  each. 
This  can  not,  however,  be  urged  as  an  adequate  excuse  for 
the  failure  of  that  financial  policy  adopted  for  the  prosecu- 
tion of  the  war.  All  that  may  be  truthfully  said  is,  that  the 
failure  of  this  policy  was  demonstrated  more  quickly  than 
would  have  been  the  case  could  specie  payments  and  clear 
accounts  have  been  maintained. 


FINANCIAL  MANAGEMENT  OF  A  WAR.  121 

From  the  table  given  above,  it  appears  that  the  proceeds 
of  the  loan  of  March  2J:,  ISli,  are  presented  in  three  separate 
sets  of  figures.  This  method  is  adopted  in  order  that  the 
tendencies  making  their  appearance  at  this  time  in  connec- 
tion with  treasury  management  may  be  more  perfectly  dis- 
closed. There  was  authorized  by  this  act  a  placement  of 
$25,000,000  of  bonds.  The  first  call  was  for  $10,000,000, 
which  resulted  in  the  receipt  of  $7,935,581  in  cash,  and  in 
the  issue  of  $9,919,476  in  six-per-cent  stock.  This,  it  will 
be  observed,  was  a  sale  of  bonds  at  twenty  per  cent  discount, 
being  a  lower  price  by  eight  cents  in  the  dollar  than  any 
which  the  government  had  previously  accepted.  Four 
months  later,  a  second  advertisement  appeared  calling  for 
$6,000,000  additional  of  the  $25,000,000  authorized.  The 
amount  of  debt  created  by  this  operation  was  $5,384,134,  but 
the  equivalent  of  cash  received  into  the  treasury  was  only 
$4,307,307.  At  the  time,  however,  that  the  major  part  of 
this  loan  was  negotiated,  a  depreciated  paper  was  accepted  as 
the  medium  of  payment ;  and,  if  one  permit  this  discount  to 
modify  his  calculations,  he  will  discover  that  the  specie  price 
of  these  bonds  was  a  trifle  above  seventy  cents  on  the  dollar. 
Nor  do  these  figures  adequately  present  the  decadence  of 
public  credit,  for  the  government  found  it  necessary  to  resort 
to  unusual  devices  in  order  to  place  the  bonds  at  all.  To  the 
extent  of  $1,900,000  this  debt  found  subscribers  in  the  cities 
of  New  York,  Philadelphia,  and  Baltimore,  on  condition 
that  the  amounts  subscribed  should  be  expended  in  the  de- 
fense of  the  cities  furnishing  the  money.  Such  dickering 
and  trading  show  the  exhausted  condition  of  public  credit 
even  more  clearly  than  the  discount  suffered. 

The  third  attempt  to  raise  money  on  authority  of  the  act 
of  March  24th  marks  the  collapse  of  the  loan  policy.  Of  the 
total  amount  of  debt  authorized,  there  remained  $12,757,112 
to  be  placed,  and  we  may  be  sure  that  the  government  would 
have  gladly  received  the  entire  sum.  The  amount  of  stock 
created  was  $746,403,  the  equivalent  of  cash  received  being 
$652,534.     The  nominal  price  varied  from  eighty  to  ninety- 


122  NATIONAL  DEFICIT  FINANCIERING. 

five,  the  specie  price  ranging  from  sixty-five  to  sixty-rmie. 
Of  tlie  moneys  thus  received,  less  than  $23i,000  were  availa- 
ble for  war  purposes,  the  remainder  being  paid  after  the 
declaration  of  peace ;  and  of  this  modest  sum  $150,000  was 
signed  by  certain  corporations  of  Baltimore  to  build  a  frigate 
for  the  defense  of  their  own  harbor.  During  the  last  quarter 
of  the  year  1814,  receipts  from  all  sources  fell  far  short  of 
expenditures,  so  that  an  actual  deficit  of  $3,800,000  made  its 
appearance  in  public  accounts. 

Do  not  such  facts  justify  the  conclusion  that  the  con- 
trol of  the  public  treasury  during  the  war  of  1812  proved  a 
failure  ?  At  the  beginning  of  the  struggle,  Mr.  Bacon  said 
he  did  not  know  how  long  it  would  be  before  the  treasury 
must  "  wind  up  business  "  ;  the  course  of  events  showed  that 
it  was  possible  to  run  on  baseless  promises  a  little  over  two 
years.  But  it  may  be  asked  :  "Was  this  failure  due  to  the  er- 
roneous principles  upon  which  the  financial  policy  was  based, 
or  to  bad  administration  ?  The  testimony  of  contemporary 
statesmen  upon  this  point  is  of  much  importance.  In  the 
latter  part  of  1814,  the  necessity  for  new  and  vigorous  rev- 
enue legislation  came  to  be  quite  generally  recognized.  The 
President  stated  this  as  one  of  the  two  reasons  for  calling  an 
extra  session  of  Congress  in  September.  But  the  most  direct 
and  complete  testimony  upon  this  point  is  found  in  the  finan- 
cial documents  of  Mr.  Dallas,  who  was  called  to  administer 
the  Department  of  the  Treasury.  "The  plan  of  finance," 
says  the  new  Secretary,  referring  to  the  months  in  question, 
"which  was  predicated  upon  the  theory  of  defraying  the 
extraordinary  expenses  of  the  war  by  successive  loans,  had 
already  become  inoperative."  ITor  did  the  new  Secretary 
shrink  from  placing  the  responsibility  of  failure  where  it  be- 
longed. The  falling  off  of  revenue  and  the  collapse  of  credit 
were  not  ascribed  by  him  to  either  "  the  want  of  resources  or 
the  want  of  integrity  in  the  nation,"  but  "  to  the  inadequacy 
of  our  system  of  taxation  to  form  a  foundation  of  public 
credit,  and  the  absence  from  our  system  of  the  means  which 
are  the  best  adapted  to  anticipate,  collect,  and  distribute  the 


FINANCIAL  MANAGEMENT  OF  A  WAR.  123 

public  revenue."  He  proposed  the  adoption  of  a  new  plan  of 
iinauce,  the  characterizing  feature  of  which  should  be  "  prompt 
and  resolute  application  to  the  resources  of  the  country." 
In  addition  to  the  re-establishment  of  a  national  bank,  his  poli- 
cy embraced  three  distinct  revenue  measures.  He  demanded, 
hrst,  war-taxes,  nor  did  he  mean  by  this  expression  what  Mr. 
Bacon  meant  in  1812 ;  second,  tax-loans,  or  temporary  loans, 
by  means  of  which  the  new  taxes  could  become  immediately 
available ;  third,  an  extensive  use  of  treasury  notes,  approach- 
ing a  little  more  nearly  our  modern  idea  of  legal  tenders.^ 

Any  criticism  upon  this  plan  should  be  made  in  view  of 
the  fact  that  two  years  of  inadequate  financial  administration 
had  bequeathed  a  legacy  of  confusion  and  of  disordered 
credit.  The  problem  presented  to  Mr.  Dallas  did  not  con- 
sist in  forming  a  war  policy  which  should  harmonize  in  all 
particulars  with  the  requirements  of  sound  finance,  but  in  res- 
cuing the  finances  of  the  state  from  disaster  already  experi- 
enced. So  far  as  his  plan  refers  to  taxes,  it  is  commendable. 
Twenty-one  millions  were  to  bo  drawn  from  this  source. 
The  tax-loans,  also,  were  demanded  by  the  necessities  of  the 
case.  It  is  likewise  commendable  that  he  did  not  at  this 
time  make  the  treasury  notes  a  legal  tender  for  the  payment 
of  debts.  Yet  this  would  have  been  the  necessary  and  logic- 
al result  of  the  financial  policy  framed  by  Gallatin.  They 
"who  defend  the  loan  policy  always  assume  that  public 
credit  can  be  maintained  by  an  increase  of  the  tax-levy  equal 
to  the  current  demands  of  the  public  stock  created,  but  this  is 
found  to  be  a  mistake.  It  is  because  this  is  impossible,  and 
because  men  will  not  freely  lend,  that  the  government  feels 
justified  in  forcing  a  loan  out  of  the  people  by  means  of 
legal-tender  notes.     The  first  issue  of  treasury  notes,  it  will 

'  This  financial  plan,  submitted  by  Secretary  Dallas,  may  be  found  in  a  letter 
of  October  17,  1814,  addressed  to  the  Committee  of  Ways  and  Means.  The  note 
from  the  committee,  asking  for  suggestions,  is  also  significant.  Its  first  sentence 
is  as  follows :  "  The  Committee  of  Ways  and  Means  have  had  under  their  con- 
sideration the  support  of  public  credit  by  a  system  of  taxation  more  extended 
than  the  one  hitherto  adopted."    Cf .  "  Life  and  Writings  of  Dallas,"  pp.  234-243. 


124: 


NATIONAL  DEFICIT  FINANCIERING. 


be  remembered,  was  regarded  as  necessary  because  of  tbe 
tardy  sale  of  bonds,  and  it  is  but  another  step  in  the  path 
already  entered  upon  to  give  notes  a  forced  circulation. 
Legal-tender  notes  He  as  a  germ  in  the  loan  policy,  and  it  is 
probable  that  the  termination  of  the  war  saved  the  country 
from  the  calamity  which  their  issue  would  have  occasioned. 

Some  of  my  readers  may  be  inclined  to  excuse  Mr.  Gal- 
latin from  all  responsibihty,  and  to  deny  that  the  failure  of 
treasury  administration  during  the  war  of  1812  argues  aught 
against  the  sufficiency  of  the  loan  policy  proposed  by  him, 
because  Congress  refused  to  grant  the  new  taxes  asked  for 
at  the  beginning  of  the  war.  It  is  true  that  a  proper  admin- 
istration of  the  loan  policy  demands  clear  revenue  equal  to 
the  debt  service  and  the  peace  expenditure.  It  is  also  true 
that  the  special  tax-bills  recommended  to  the  TweKth  Con- 
gress failed  to  secure  legal  sanction  ;  but  it  would  be  incor- 
rect to  conclude,  because  these  particular  taxes  were  with- 
held, that  the  essential  requirements  of  the  loan  policy  were 
not  complied  with.  A  glance  at  the  general  balance-sheet 
covering  the  three  years  of  the  war  will  show  that  permanent 
revenue  not  only  covered  permanent  expenditure,  but  fur- 
nished a  surplus  of  nearly  $6,000,000  for  war  purposes. 
Although  the  new  taxes  were  refused,  the  receipts  from  old 
taxes  exceeded  expectation ;  it  is  impossible,  therefore,  for 
the  advocates  of  the  loan  theory  to  shift  the  responsibility  of 
the  failure  of  Mr.  Gallatin's  policy  upon  the  shoulders  of  Con- 
gress.    This  balance-sheet  is  presented  in  the  following  table : 

Table  showing  the  source  of  moneys  expended  for  war 
purposes. 


TEAR  ENDING 

War  expenditure  paid  out 
of  proceeds  of  taxes. 

War  expenditure  paid  out 
ol  proceeds  of  loans. 

December  31,  1812 

December  31,  1813 

December  31,  1814 

$3,560,150.00 

1,399,277.71 

775,828.53 

$12,477,988.39 
24,849,810.41 
27,047,309.37 ' 

Total 

$5,735,256.24 

$64,375,108.17 

*  There  is  included  in  this  sum  an  actual  deficit  in  accounts. 


FINANCUL  MANAGEMENT  OF  A  WAR.  125 

It  thus  appears  that,  for  a  total  war  expenditure  of  some 
$70,000,000,  it  was  found  necessary  to  create  a  debt  of  only 
$64,300,000,  a  fact  which  shows  how  futile  is  an  apology 
like  that  suggested  above  in  favor  of  the  loan  policy.  So 
far  as  clear  revenue  is  concerned,  the  demands  of  the  theory 
were  met,  and  it  is  the  theory  rather  than  the  remissness  of 
Congress  that  must  be  held  responsible. 

Or,  again,  it  may  be  that  some  one,  quoting  that  old  maxim, 
salus  ;po^uli  suprema  lex,  a  maxim  regarded  by  dullards  as 
the  first  principle  in  finance,  will  ask :  "Wherein  did  this  pol- 
icy fail  ?  Did  not  the  Government  get  the  money  and  carry 
through  the  war  ?  Such  a  question  can  only  be  answered  by 
placing  the  actual  results  of  treasury  management  during  the 
war  of  1812  in  comparison  with  the  demands  of  adequate 
management. 

An  adequate  financial  policy  wiU  place  the  credit  of  a 
state  on  so  firm  a  basis,  and  guard  it  so  jealously,  that  the 
government  will  never  be  called  upon  to  suffer  ruinous  dis- 
count in  the  placement  of  its  bonds.  The  record  of  this  war 
shows  that  even  at  the  beginning  there  was  no  enthusiasm 
for  the  public  stocks,  that  every  month  as  it  passed  saw  the 
nation's  credit  decline,  and  that  the  last  quarter  of  the  year 
1814  showed  a  deficit  in  public  accounts  while  the  govern- 
ment still  possessed  the  right  to  borrow  $12,000,000. 

An  adequate  financial  policy  will  provide  such  extensive 
resources  that  a  war  once  entered  upon  may  be  carried 
through  to  the  end  without  change  of  plan.  It  must  be  elas- 
tic and  pliable,  so  as  to  be  ready  for  all  probable  emergencies. 
In  the  present  instance,  after  little  more  than  two  years  of 
vain  endeavor  to  supply  the  demands  of  the  government,  the 
original  plan  was  abandoned,  and  a  new  theory  was  admitted 
by  the  administration  and  by  Congress.  The  evils  necessarily 
attendant  upon  this  change  in  the  midst  of  a  war  were  only 
obviated  by  the  return  of  peace. 

An  adequate  finanical  policy  will  not  be  forced  to  use 
treasury  notes,  except  as  a  convenient  method  of  managing 
its  taxing  system.     "We  have  already  noticed  how  that  un- 


126  NATIONAL  DEFICIT  FINANCIERING. 

warranted  interference  witli  tlie  circulating  medium  follows 
logically  from  a  determination  to  throw  the  entire  weight  of 
war  expenditure  upon  public  credit. 

It  must  be  admitted  that  Mr.  Dallas  passed  lightly  over 
this  stupendous  failure  in  financial  administration  when,  in 
reviewing  the  financial  operations  of  the  war,  he  said : 

An  increase  of  the  expense,  and  a  diminution  of  the  sup- 
ply, must  have  been  anticipated  as  the  inevitable  consequences 
of  that  event  ;  but  the  government  reposed  with  confidence 
for  all  the  requisite  support  upon  the  untried  resources  of  the 
nation  in  credit,  in  capital,  and  in  industry.  The  confidence 
was  justly  reposed  ;  yet  it  may,  perhaps,  be  considered  as  the 
subject  for  regret,  and  it  certainly  furnishes  a  lesson  of  prac- 
tical policy,  that  there  existed  no  system  by  which  the  internal 
resources  of  the  country  could  be  brought  at  once  into  action, 
when  the  resources  of  its  external  commerce  became  incompe- 
tent to  answer  the  exigencies  of  the  time.  The  existence  of 
such  a  system  would  probably  have  invigorated  the  early 
movements  of  the  war,  might  have  preserved  the  public  credit 
unimpaired,  and  would  have  rendered  the  pecuniary  contribu- 
tions of  the  people  more  equal  as  well  as  more  effective.  But, 
owing  to  the  want  of  such  a  system,  a  sudden,  and  an  almost 
exclusive,  resort  to  the  public  credit  was  necessarily  adopted  as 
the  chief  instrument  of  finance.  The  nature  of  the  instrument 
employed  was  soon  developed  ;  and  it  was  found  that  public 
credit  could  only  be  durably  maintained  upon  the  broad  foun- 
dations of  public  revenue.^ 

It  is  not  my  purpose  to  follow  thus  in  detail  the  financial 
history  of  the  war  of  1861.  So  far  as  principles  are  con- 
cerned, it  presents  nothing  with  which  the  foregoing  study 
has  not  already  made  us  familiar.  Here  is  found  the  same 
policy  for  the  management  of  the  public  treasury ;  this  poli- 
cy follows  the  same  course  in  its  development,  and  works  the 
same  general  results.  The  only  variation  in  the  record  per- 
tains to  the  use  of  treasury  notes,  for,  in  the  case  of  this  sec- 
ond war,  the  loan  policy  was  not  arrested  until  these  notes 
were  given  the  legal  power  of  paying  private  debts.  Upon 
the  main  point  there  can  be  no  question.  The  plan  recom- 
mended by  Secretary  Chase,  and  adopted  by  Congress,  was 

^  "Eeport  on  the  Finances,"  December,  1815. 


FINANCIAL  MANAGEMENT  OF  A  WAR.  127 

to  rely  upon  public  credit  for  carrying  through  the  war.  In 
a  special  report  of  July,  1861,  which  deals  with  ways  and 
means,  the  Secretary  expresses  himself  as  follows : 

To  provide  the  large  sums  required  for  ordinary  expendi- 
ture, and  by  the  existing  emergency,  it  is  quite  apparent  that 
duties  on  imports,  the  chief  resource  for  ordinary  disbursements, 
will  not  be  adequate.  The  deficiencies  of  revenue,  whether 
from  imports  or  other  sources,  must  necessarily  be  supplied 
from  loans  ;  and  the  problem  to  be  solved  is  that  of  so  propor- 
tioning the  former  to  the  latter,  and  so  adjusting  the  details 
of  both,  that  the  whole  amount  needed  may  be  obtained  with 
certainty,  with  due  economy,  with  the  least  possible  incon- 
venience, and  with  the  greatest  possible  incidental  benefit  to 
the  people. 

The  Secretary  has  given  to  this  important  subject  the  best 
consideration  which  the  urgency  of  varied  public  duties  has 
allowed,  and  now  submits  to  the  consideration  of  Congress, 
with  great  deference  and  no  little  distrust  of  his  own  judgment, 
the  conclusions  at  which  he  has  arrived. 

He  is  of  the  opinion  that  not  less  than  eighty  millions  of 
dollars  should  be  provided  by  taxation,  and  that  two  hundred 
and  forty  millions  should  be  sought  through  loans. 

It  will  hardly  be  disputed  that,  in  every  sound  system  of 
finance,  adequate  provision  by  taxation  for  the  prompt  dis- 
charge of  all  ordinary  demands,  for  the  punctual  payment  of 
the  interest  on  loans,  and  for  the  creation  of  a  gradually  in- 
creasing fund  for  the  redemption  of  the  principal,  is  indispensa- 
ble. Public  credit  can  only  be  supported  by  public  faith,  and 
public  faith  can  only  be  maintained  by  an  economical,  ener- 
getic, and  prudent  administration  of  public  affairs,  and  by  the 
prompt  and  punctual  fulfillment  of  every  public  obligation. ' 

This  financial  policy  may  be  more  clearly  apprehended 
if  we  notice  the  estimates  presented  by  the  Secretary.  As 
has  been  already  stated,  he  proposed  to  raise  $80,000,000  by 
taxes,  as  against  $240,000,000  by  loans.  Of  this  amount  of 
clear  revenue,  $65,800,000  were  required  to  meet  the  ordi- 
nary expenditures  of  the  peace  establishment.  It  was  believed 
that  existing  laws  would  provide  about  $60,000,000,  from 
which  it  followed  that  new  taxes  to  the  amount  of  $20,000,- 
000  were  required.     Of  this  sum,  $9,000,000  were  to  be  de- 

^  "Report  on  the  Finances,"  July  4,  1861. 


128  NATIONAL  DEFICIT  FINANCIERING. 

voted  to  payment  of  interest  upon  the  new  debt,  and  $5,000,- 
000  to  the  establishment  of  a  sinking-fund  for  its  final 
expungement.  Such  was  the  financial  plan  upon  which  this 
great  war  was  begun. 

The  revenue  law  which  followed  this  report  modified 
customs  duties  so  as  to  intensify  the  principle  of  industrial 
protection,  established  a  three-per-cent  income-tax  upon  all 
incomes  over  ^800,  and  apportioned  a  direct  tax  of  $20,000,- 
000  among  the  several  States.  The  income-tax  was  not  to 
take  effect  until  January,  1862,  and,  as  the  direct  tax  was 
apportioned  to  the  South  as  well  as  to  the  North,  the  treasury 
could  not  hope  for  the  entire  amount  levied. 

In  the  December  report,  18G1,  the  Secretary  declared  re- 
newed confidence  in  the  financial  plan  which  he  had  pre- 
viously presented.  It  was  found,  however,  that  receipts  from 
customs  and  from  the  sale  of  public  lands  had  fallen  o£f. 
Thus,  for  the  quarter  ending  September  30th,  customs  duties 
had  yielded  but  $7,198,602.  For  the  calendar  year  ending 
1861,  the  government  received  but  $30,795,795  from  this 
source,  as  opposed  to  $50,747,990  in  1860,  and  $53,800,596 
in  1859.  There  seemed,  therefore,  just  ground  for  appre- 
hension lest  existing  taxes  should  fail  to  support  the  peace 
establishment,  and  the  loans  which  the  government  chose  to 
place.  This  fear  of  a  deficit,  from  ordinary  sources  of  rev- 
enue, impressed  itself  upon  the  mind  of  the  Secretary,  and, 
in  consequence,  he  proposed  additional  duties  on  tea,  coffee, 
and  sugar ;  a  modification  of  the  income-tax,  so  as  to  render 
it  more  productive ;  an  increase  of  the  direct  tax  to  the 
States;  and  a  tax  on  whiskies,  tobacco,  bank-notes,  instru- 
ments of  conveyance,  and  the  like;  in  short,  he  proposed 
the  establishment  of  the  system  of  internal  duties.  Now,  all 
this  has  the  appearance  of  an  abandonment  of  the  loan-policy, 
and  the  adoption  of  the  policy  of  carrying  through  the  war 
by  taxes,  but  this  is  true  in  appearance  only.  The  total  sum 
of  clear  revenue  hoped  for  from  all  these  sources  of  income 
was  but  $90,000,000,  and  this,  as  the  Secretary  said,  was  not 
more  than  enough  to  meet  "  even  economized  disbursements. 


FINANCUL  MANAGEMENT  OF  A  WAR.  129 

and  pay  the  interest  on  tlie  public  debt,  and  provide  a  sink- 
ing-fund for  the  gradual  reduction  of  its  principal."  "It 
wiU  be  seen  at  a  glance,"  says  the  report  in  another  place, 
"  that  the  amount  to  be  derived  from  taxes  forms  but  a  small 
portion  of  the  sums  required  for  the  expenses  of  the  war. 
For  the  rest,  reliance  must  be  placed  on  loans."  It  is  also 
worthy  of  notice,  as  throwing  additional  light  upon  the  policy 
of  the  administration,  that  the  mind  of  the  Secretary  seems 
at  this  time  to  have  been  taken  up  with  his  scheme  for  estab- 
lishing a  system  of  national  banking ;  for,  as  is  well  known, 
one  purpose  of  this  scheme  was  to  provide  a  ready  market 
for  public  bonds.  It  comes,  therefore,  into  perfect  harmony 
with  the  loan  policy  already  adopted. 

It  was  in  the  latter  part  of  the  year  1863,  and  during 
the  first  part  of  1864,  that  the  inadequacy  of  the  loan  policy 
as  a  basis  of  war-financiering  forced  itseK  upon  the  minds 
of  those  who  managed  public  affairs.  "  To  check  the  in- 
crease of  debt,"  says  the  report  of  1863,  "  must  be,  in  our 
circumstances,  a  prominent  object  of  patriotic  solicitude." 
And  again :  "  Hitherto  the  expenses  of  the  war  have  been 
defrayed  by  loans  to  an  extent  which  nothing  but  the  ex- 
pectation of  its  speedy  termination  could  fuUy  warrant." 
The  report  then  restated  the  financial  policy  as  adopted  in 
1861,  and  continued : 

The  financial  administration  of  the  first  fiscal  year  after 
the  outbreak  of  the  rebellion  was  conducted  upon  these  ideas. 
The  acts  of  Congress  at  the  extra  session  of  July,  1861,  were 
framed  with  the  intention  of  supplying  the  full  amount  of 
revenue  demanded  by  them.  But  receipts  disappointed  ex- 
pectation, and  it  soon  became  obvious  that  a  much  larger  pro- 
portion of  the  means  needed  for  the  fiscal  year  1862  than  the 
principle  adopted  would  allow  must  be  derived  from  loans. 

But  the  most  interesting  expression  in  this  document 
pertains  to  the  estimates  for  probable  future  demands : 

These  statements  [says  the  Secretary,  referring  to  the  es- 
timates] illustrate  the  great  importance  of  providing,  beyond 
all   contingency,  for  ordinary  expenditures  and  interest  on 


130  NATIONAL  DEFICIT  FINANCIERING. 

debt,  and  for  tbe  largest  possible  amount  of  extraordinary 
expenditures,  by  taxation.  In  proportion  to  tbe  amount  raised 
above  tbe  necessary  sums  for  ordinary  demands  will  be  tbe 
diminution  of  debt,  tbe  diminution  of  interest,  and  tbe  im- 
provement of  credit.  It  is  bardly  too  mucb — perbaps  bardly 
enougb — to  say  tbat  every  dollar  raised  for  extraordinary  ex- 
penditures or  reduction  of  debt  is  wortb  two  in  tbe  increased 
value  of  national  securities,  and  increased  facilities  for  tbe  ne- 
gotiation of  indispensable  loans. 

Could  tbis  trutb  bave  been  recognized  at  tbe  beginning 
of  tbe  war,  and  could  it  at  tbat  time  bave  influenced  tbe 
treasury  policy,  tbe  financial  bistory  of  tbe  last  twenty-five 
years  would  bave  been  materially  modified. 

Congress  also,  in  tbe  latter  part  of  1863,  began  to  recog- 
nize tbe  essential  weakness  of  tbe  loan  policy,  and  to  turn 
its  attention  to  the  necessity  of  taxes  for  distinctively  war 
purposes.  Tbe  great  tax-bills  of  tbe  war  were  those  of  June, 
1864.  Mr.  Morrill,  in  whose  speech  of  a  year  before  there 
were  statements  showing  that  the  original  policy  was  yet 
intact,  admitted,  while  presenting  these  new  bills,  that  money 
must  now  be  secured  by  every  possible  means  : 

Tbe  treasury  [be  said]  requires  a  larger  supply  of  means, 
and  such  sources  of  revenue  as  bave  not  already  yielded 
their  maximum  contributions  must  now  be  sought,  so  tbat  we 
may  fill  tbe  measure  of  our  wants.  .  .  .  This  [bill]  is  intend- 
ed as  a  war  measure,  a  temporary  measure,  and  it  is  need- 
ful tbat  it  pass  speedily.  Every  day's  delay  in  tbe  passage  of 
tbis  and  tbe  internal  revenue  bill  costs  tbe  treasury  not  less 
than  $500,000.^ 

This  language  is  very  different  from  tbe  financial  dilet- 
tanteism  tbat  marked  the  attitude  of  om-  financiers  during 
the  first  two  years  of  the  war. 

It  is  somewhat  difficult  to  exhibit  accurately  the  rapid  fall 
of  public  credit  from  1861  to  1866 ;  but  I  bave  undertaken  in 
tbe  following  statement  to  approximate  such  an  exhibit  by 
showing  the  specie  price  of  all  the  obligations  issued  during 
the  war.    The  computation  has  been  made  by  estimating  tbe 

^  Young's  "  Customs-Tariff  Legislation,"  p.  cxxxiii. 


FINANCIAL  MANAGEMENT  OF  A  WAR. 


131 


value  of  tlie  total  receipts  from  credit  for  each  quarter  at 
the  average  price  of  gold  during  that  quarter.  The  only- 
source  of  error  in  this  method  arises  from  the  fact  that  the 
average  price  of  gold  for  any  three  months  may  not  be  the 
actual  price  at  which  the  proceeds  of  bonds  were  covered 
into  the  treasury,  but  any  closer  computation  requires  more 
complete  data  than  the  authorities  at  "Washington  have  yet 
given.  It  is,  however,  believed  that  the  conclusions  may  be 
relied  upon  as  subtantially  correct. 

Tahle  shoioing  treasury  receipts,  from  puhlic  ohligations  of 
all  sorts,  for  each  quarter  during  the  war,  and  the  gold 
value  of  such  receipts,  estimated  on  the  average  price  of 
gold  for  each  quarter. 


SUMMARY. 

Gross  receipts  from 

Gold  value  of  gross 

Percent- 

debt  created. 

receipts. 

realized. 

For  the  quarters  ending — 

March  31,        1862 

86O,947,202.6'7 

859,527,132.84 

97-67 

June  30,             "    

209,049,203.81 

200,230,763.59 

95-78 

September  30,   "    

68,934,420.36 

59,648,953.94 

86-54 

December  31,    "    

131,631,479.40 

101,250,933.95 

76-92 

March  31,        1863 

178,669,759.25 

115,195,351.69 

64-51 

June  30,            "    

216,460,067.49 

145,829,147.47 

67-37 

September  30,   "    

118,267,491.75 

89,800,506.48 

75-93 

December  31,     "    

150,450,843.85 

100,862,245.72 

67-40 

March  31,        1864 

191,922,104.42 

120,220,006.20 

62-64 

June  30,            "    

235,371,791.92 

122,581,629.23 

52-08 

September  30,   "    

147,735,822.42 

61,295,592.72 

41-49 

December  31,    "    

179,908,674.29 

80,365,204.80 

44-67 

March  31,        1865 

175,313,376.72 

88,094,971.80 

50-25 

June  30,             "    

361,905,625.74 

253,406,319.14 

70-02 

September  30,   "    

138,765,727.22 

97,038,873.04 

69-93 

For  the  years  ending — 

December   31,1862 

8470,562,306.24 

$420,657,784.32 

89-39 

"          31,1863 

663,748,162.-34 

451,687,251.36 

68-05 

"          31,1864 

754,938,393.05 

384,462,432.95 

50-93 

September  30,  1865 

675,984,729.68 

438,540,163.98 

64-87 

For  the  forty-five  months  of 

the  war 

$2,565,233,591.31 

11,695,347,632.61 

66-09 

It  seems  superfluous  to  comment  on  such  figures  as  these. 
A  treasury  administration  that  permits  the  credit  of  a 
wealthy  people  to  decline  so  that  its  obligations  fall  fifty  per 


132 


NATIONAL  DEFICIT  FINANCIERING. 


cent  and  remain  there  for  a  year,  can  hardly  be  called  suc- 
cessful. Yet  the  results  here  displayed,  as  also  the  forced 
circulation  of  treasury  notes,  follow  naturally  from  the 
attempt  to  carry  through  a  war  by  loans. 

But  the  lesson  of  these  public  accounts  is  not  fully  ap- 
preciated until  it  is  observed  with  what  ease  a  system  of  in- 
ternal revenue  may  be  made  to  respond  to  a  vigorous  and 
decided  administration,  for  this  shows  how  unnecessary  it  is 
to  rely  wholly  upon  public  credit  for  extraordinary  expendi- 
tures. In  this  connection  the  following  table  is  pertinent 
for  our  consideration. 

Table  showing  receipts  from  various  sources,  for  fiscal  years, 
in  denominations  of  millions. 


1861. 

1862. 

1863. 

1864. 

1865. 

1866. 

Customs  revenue 

Internal  revenue 

Miscellaneous 

39-6 

'  'r9 

49-0 
1-7 
1-1 

69-0 

39-1 

4-5 

102-3 

110-2 

52-1 

84-9 

210-6 

88-2 

179-0 

311-2 

67-8 

Clear  revenue 

From  loans 

41-5 
23-7 

51-9 
433-6 

112-6 
595-6 

264-6 
696-0 

333-7 
864-8 

658-0 
92-6 

Total  revenue... . 

65-2 

485-5 

708-2 

960-6 

1,198-5 

650-6 

It  requires  no  extended  study  to  discover  the  meaning  of 
these  figures.  The  criticism  which  they  offer  makes  its 
appearance  when  one  asks  what  would  probably  have  been 
the  financial  consequences  could  the  receipts  from  internal 
revenue  have  been  moved  ahead  two  years.  Suppose,  for 
example,  that  Secretary  Chase  could  have  received  from  this 
source  $110,000,000  in  1862,  $210,000,000  in  1863,  and 
$311,000,000  in  1864 ;  what  a  change  would  it  have  produced 
upon  the  course  of  financial  administration !  Its  moral  effect 
upon  the  South,  working  especially  through  her  European 
sympathizers,  would  have  brought  the  war  to  a  more  speedy 
termination,  the  credit  of  the  government  could  not  have 
suffered  as  it  did,  while  the  advocates  of  legal-tender  money 
would  have  been  deprived  of  the  argument  of  necessity. 
Kow  the  responsibility  for  the  tardy  flow  of  revenue  from 


FINANCIAL  MANAGEMENT  OF  A  WAR.  133 

internal  duties  is  traceable  to  the  policy  upon  wliich  the 
finances  of  the  war  were  set  on  foot,  and  not  to  the  inability 
or  the  reluctance  of  the  country  to  pay.  Secretary  Chase 
denied  the  necessity  of  meeting  any  part  of  war  expenditure 
from  war-taxes,  because  the  financial  theory  which  he 
espoused  deprecated  the  endeavor ;  and  it  required  nearly 
three  years  of  disastrous  treasury  management  to  convert  the 
administration  and  Congress  from  this  erroneous  theory.  In 
view  of  actual  conditions,  it  is  perhaps  a  little  extravagant 
to  suppose  that  the  receipts  from  internal  revenue  could 
have  been  moved  ahead  two  years,  but  it  is  altogether  rea- 
sonable to  conclude  that  a  vigorous  administration  might 
have  anticipated  actual  results  by  eighteen  months. 

This  estimate  allows  nearly  a  year  for  the  establishment 
of  the  system,  and  claims  only  that  internal  revenue  should 
have  begun  to  come  into  the  treasury  at  the  rate  of  $9,000,- 
000  a  month  as  early  as  July,  1862.  And  when  it  is 
noticed  how  quickly  the  industries  of  the  country  responded 
to  the  laws  of  1864,  as  shown  by  the  receipts  for  the  year 
1865,  one  can  not  regard  this  claim  as  at  all  impracticable. 
There  is  here  disclosed  the  fundamental  error  of  that  theory 
which  looks  to  credit  as  the  only  source  of  war  expendi- 
tures. It  is  blindly  optimistic,  and  so  deprecates  an  appeal 
to  sources  of  revenue  that  might  with  ease  be  opened. 
They  who  undertake  its  administration  are  sure  to  let  matters 
drift  until  financial  disaster  awakens  them  to  the  fact  that 
the  financial  problem  is  no  longer  under  their  control.  This 
theory  springs  from  financial  ignorance,  from  a  sense  of  admin- 
istrative weakness,  and  from  a  thorough  distrust  of  the  people. 

It  appears,  then,  that  the  history  of  the  war  of  1861,  like 
that  of  1812,  bears  direct  testimony  against  the  sufficiency  of 
the  loan  policy.  It  is  no  apology  for  the  men  who  adminis- 
tered public  affairs  that  they  looked  upon  the  Eebellion  as 
a  local  insurrection,  for,  in  matters  of  public  financiering, 
revenue  must  conform  to  necessary  expenditure ;  and  no 
policy  can  meet  approval  which  fails  to  supply  all  the  money 
that  is  needed  for  as  long  a  time  as  it  is  needed. 
10 


134  NATIONAL  DEFICIT  FINANCIERING. 

What  is  the  true  jplan  for  the  financial  management  of 
a  war  f 

Thus  far  our  argument  has  proceeded  according  to  the 
logic  of  exchision.  We  have  learned  that  the  tax  policy 
does  not  conform  to  well-known  principles  of  human  nature, 
and  that  the  loan  policy  fails  to  bear  the  test  when  tried ; 
but  since  taxes  and  loans  are  the  only  sources  of  revenue 
open  to  modern  financiers,  it  follows  that  the  true  policy 
must  embrace  them  both.  Our  further  study,  therefore, 
must  concern  itself  with  inquiring  what  constitutes  a  rea- 
sonable union  of  taxes  and  loans. 

We  shall  be  assisted  in  answering  this  question  if  we 
notice,  at  the  outset,  certain  fiscal  principles  or  truths  that 
point  to  the  correct  theory  of  treasury  management.  First, 
the  habit  of  bearing  taxes  is  one  easily  acquired,  if  only  the 
instruction  be  given  in  a  proper  manner.  It  is  never  neces- 
sary to  depend  altogether  upon  loans  for  war  expenditure, 
and  the  administration  that  shrinks  from  a  levy  of  taxes,  lest 
the  war  spirit  be  chilled,  shows  either  a  doubtful  cause  or  a 
weak-kneed  cabinet.  As  a  second  principle  may  be  stated 
the  fact  that  it  is  easier  to  raise  the  rate  of  existing  taxes 
than  to  establish  a  new  system  of  duties.  From  this  it  fol- 
lows that  the  germ  of  a  war  policy  lies  back  in  the  treasury 
policy  of  ordinary  times.  Again,  it  is  popular  support, 
rather  than  the  adherence  of  a  syndicate  of  banks,  which  in- 
sures the  success  of  a  financial  policy.  This  is  true,  because 
popular  sentiment  in  favor  of  the  administration  guarantees 
the  support  of  the  banks,  but  it  is  not  true  that  the  support 
of  the  banks  brings  with  it  general  enthusiasm.  This  does 
not  mean  that  banks  should  never  be  employed  as  agents  of 
the  government,  but  that  the  administration  should  be 
superior  to  the  criticisms  of  the  banking  interest,  that  the 
basis  of  its  operations  should  be  as  broad  as  possible,  and 
that  it  is  no  sign  of  weakness  to  appeal  to  patriotism  as  a 
motive  for  lending  money.  And,  lastly,  it  is  a  truth  worth 
remembering  that  democratic  peoples  are  willing  to  go  all 
lengths  with  a  government  which  takes  them  into  its  confi- 


FINANCIAL  MANAGEMENT  OF  A  WAR.  I35 

dence.  It  is  assumed  tliat  the  purpose  of  the  war  is  ap- 
proved, otherwise  there  is  no  apology  for  undertaking  it ; 
but,  granting  this,  personal  sacrifice  and  assistance  are  assured 
to  a  government  so  long  as  the  public  continues  to  have  con- 
fidence in  the  efficiency  of  its  administration.  The  meaning 
of  this  fact  is,  that  an  adequate  financial  policy  should  be 
bold,  courageous,  sufficient,  and  simple;  that  it  should  lie 
close  to  the  sympathies  of  the  people,  and  not  fear  to  make 
from  them  searching  demands.  We  have  now  before  us  the 
raw  material  out  of  which  to  construct  a  plan  for  the  finan- 
cial management  of  a  war. 

Coming  then  directly  to  the  question  in  handj  it  is  of 
prime  necessity  to  recognize  that  good  financiering  in  times 
of  emergency  is  only  possible  upon  the  basis  of  an  adequate 
revenue  system  previously  established.  It  has  been  already 
stated  that  some  preparation  in  time  of  peace  should  be  made 
against  the  advent  of  war,  but  that  the  assignment  of  a  par- 
ticular tax  to  this  purpose,  or  the  accumulation  of  a  war-re- 
serve, does  not  accord  with  the  most  perfect  financial  require- 
ments.^ How,  then,  may  the  peace  establishment  provide 
against  unusual  demands?  J^othing  more  is  required  for 
this  purpose  than  that  the  permanent  system  should  be  so 
adjusted  as  to  respond  quickly  to  any  change  in  rates  im- 
posed, and  this  can  be  easily  done  by  fixing  the  ordinary  rate 
of  taxation  below  the  maximum  revenue  rate.  But,  if  the 
actual  rate  of  taxation  in  ordinary  times  be  at  or  above  the 
maximum  revenue  rate,  the  administration  can  hope  for  no 
assistance,  in  case  of  an  emergency,  from  established  taxes. 
Under  such  circumstances  the  government  is  embarrassed  at 
the  outset,  and  easily  persuades  itself  that  an  appeal  to  credit 
is  the  only  method  for  making  headway  against  demands. 
But  let  it  be  supposed,  on  the  other  hand,  that  the  country 
possesses  a  broad  system  of  taxation,  so  that  ordinary  demands 
may  be  met  by  imposing  light  duties,  any  embarrassment 
encountered  by  the  minister  of  finance  at  the  beginning  of 
a  war  must  be  of  his  own  making. 

»  Cf.  ante,  pp.  84-95. 


136  NATIONAL  DEFICIT  FINANCIERING. 

But,  assuming  sucli  provisionarj  measures  to  have  been 
taken,  wliat  is  the  next  step  in  an  adequate  war  policy  ?  ^ 

Our  answer  may  be  given  without  hesitation.  New 
sources  of  revenue  must  be  opened  by  the  levy  of  new  taxes. 
But,  it  may  be  asked,  is  not  such  a  proposal  a  virtual  aban- 
donment of  the  loan  policy  ?  This  can  not  be  admitted ;  for 
it  is  essential  that  a  law  should  be  passed  to  provide  for  clear 
revenue,  in  addition  to  that  secured  by  raising  the  rate  upon 
existing  taxes,  before  a  financier  has  any  right  to  assume  that 
he  can  borrow  large  sums  without  depressing  public  credit. 
He  can  not  rely  entirely  upon  the  new  revenue  derived  from 
the  old  taxes,  because  this  revenue  is  not  co-existent  with  the 
debts  created.  A  true  financial  policy,  also,  must  hold  in  view 
the  termination  of  the  war  as  well  as  its  continuance,  and  do 
nothing' which  can  in  any  manner  obstruct  the  speedy  reduc- 
tion in  the  rate  of  permanent  taxes  upon  a  return  of  peace. 
For,  if  the  extraordinary  income  from  the  permanent  taxes 
be  mortgaged  to  the  support  of  a  permanent  debt,  the  first 
claim  of  a  good  revenue  system  is  disregarded.  The  elastic 
quality  of  the  system  would  be  thereby  destroyed,  and  the 
country  would  be  poorly  prepared  to  meet  another  fiscal 
emergency.  And  it  must  be  further  noticed  that  these  new 
taxes,  once  established  and  brought  into  running  order,  are 
ready  at  hand  to  assist  in  the  expungement  of  debts  when  the 
war  shall  have  terminated.  It  thus  appears  that  the  new 
taxes  tend  to  strengthen  public  credit,  even  before  they  be- 
come remunerative ;  they  relieve  the  temporary  revenue 
derived  from  permanent  taxes,  so  that  it  may  again  serve  as 
the  temporary  basis  of  new  loans ;  and  they  assume  the  whole 
weight  of  the  debt  upon  a  return  of  peace. 

It  may  be  objected  to  the  plan  here  proposed  that,  should 
the  struggle  prove  of  slight  duration  and  little  cost,  the  coun- 

'  Were  this  question  asked  for  the  United  States,  the  answer  might  be  given 
more  explicitly.  In  view  of  the  peculiar  relation  existing  between  the  Federal 
government  and  the  several  States,  there  are  many  reasons  for  saying  that  this 
first  tax  should  be  a  direct  tax  upon  the  States,  apportioned  and  collected  on  the 
principle  of  "  revolutionary  requisitions." 


FINANCIAL  MANAGEMENT  OF  A  WAR.  I37 

try  is  burdened  with  useless  taxes ;  but  tbis  objection  seems 
to  be  made  without  due  consideration.  Assuming  the  diffi- 
culty to  be  quickly  terminated,  it  is  more  tban  probable  that 
the  strong  financial  policy  adopted  by  the  administration  ren- 
dered great  assistance  in  attaining  so  desirable  an  end.  If  a 
destructive  war  can  be  obviated  by  the  voting  of  taxes,  there 
are  few  who  would  withhold  their  assent,  l^or  is  it  neces- 
sary, in  the  case  assumed,  that  the  taxes  should  prove  an 
actual  burden  to  the  people,  'New  taxes  require  some  con- 
siderable time  before  they  become  productive,  and,  should 
the  occasion  for  them  pass  away,  they  may  be  abolished 
before  taking  much  from  the  pockets  of  the  people.  Let, 
then,  no  financier  argue  that  war-demand  will  probably  be 
small,  and  that  it  may  be  met  by  loans  without  an  appeal  to 
taxes ;  for  the  administration  certainly  needs  the  moral  in- 
fluence of  the  tax-laws,  the  revenue  which  these  laws  are 
capable  of  bearing  may  be  required,  and,  if  the  events  show 
the  solicitude  of  the  administration  to  have  been  groundless, 
no  great  harm  is  done. 

It  remains  for  us  to  consider  what  use  should  be  made 
of  public  credit,  and  to  discover  the  principle  according  to 
which  the  extraordinary  expenditure  should  be  apportioned 
between  loans  and  taxes.  The  theory  of  pubhc  borrowing 
is  very  simple.  Public  credit  should  always  be  regarded  as 
a  means  of  anticipating  revenue.  It  is  a  short  cut  to  capital, 
and  the  first  great  service  of  loans  in  time  of  war  is  to  give 
the  administration  immediate  control  over  capital  upon  the 
declaration  of  hostilities.  Bat  such  borrowing  does  not  ne- 
cessarily create  a  permanent  debt.  It  rests,  in  the  first  in- 
stance, upon  the  extraordinary  receipts  arising  from  the 
increase  of  rate  in  the  permanent  revenue  system.  Should 
the  war,  however,  continue  for  any  considerable  time,  it 
would  be  necessary  to  convert  the  debt  thus  created  into  a 
permanent  or  time  debt,  and  assign  it  to  new  funds  for  sup- 
port. And  here,  it  may  be  said,  is  the  only  point  at  which 
ignorance  of  the  probable  duration  of  the  extraordinary  de- 
mands may  be  permitted  to  influence  the  financial  policy  of 


138  NATIONAL  DEFICIT  FINANCIERING. 

the  administration.  It  is  proper,  until  the  future  may  be 
forecast  with  some  degree  of  certainty,  that  temporary  debts 
rather  than  permanent  debts  should  be  used.  And  here,  too, 
is  disclosed  the  peculiar  service  rendered  by  an  elastic  rev- 
enue system,  for  the  quick  command  which  such  a  system 
grants  over  revenue  provides  a  solid  basis  of  credit  at  the 
beginning  of  a  war,  and  so  insures  a  good  price  for  the  first 
bonds  negotiated. 

But  there  is  another  and  more  important  service  that  may 
be  rendered  by  loans.  When  a  government  gives  bonds  in 
return  for  capital,  the  individual  who  supplies  the  capital 
does  not  feel  that  sense  of  personal  loss  which  attends  the 
payment  of  a  tax.  He  has  merely  changed  the  character  of 
his  property.  It  thus  appears  that  by  means  of  loans  a  gov- 
ernment may  hope  to  secure  immediate  control  over  large 
funds  of  capital  while  yet  allowing  the  motives  for  continued 
industry  full  liberty  of  action.  So  far  as  it  seems  necessary 
to  use  credit  for  attaining  this  end,  the  obligations  created 
against  the  state  must  run  for  some  considerable  time,  and 
be  assigned  to  a  reliable  fund  for  the  payment  of  the  annual 
interest  which  they  demand. 

In  the  services  here  brought  to  view  lies  the  entire  theory 
of  public  credit.  Loans  are  always  a  means  of  anticipating 
assured  revenue.  No  other  meaning  can  be  attached  to  them 
when  used  to  carry  through  the  financial  operations  of  a  war, 
for  no  system  has  yet  been  devised  for  evading  the  necessity 
of  extraordinary  taxes  as  the  result  of  extraordinary  expendi- 
tures. Our  general  conclusion  then  is,  that  sound  financial 
management  inclines  always  toward  taxes.  The  measure  of 
the  amount  that  may  be  secured  by  this  means  is  found  in 
their  observed  eiiect  upon  current  industry,  for  the  demand 
for  clear  revenue  must  never  go  so  far  as  to  discourage  indus- 
trial activity. 

It  is  impossible  to  proceed  much  further  in  a  general  dis- 
cussion of  this  subject,  for  the  conflicting  interests  to  be 
harmonized,  and  the  varying  importance  of  the  factors  that 
enter  into  the  problem,  must  influence  greatly  the  appHca- 


FINANCIAL  MANAGEMENT  OF  A  WAR.  139 

tion  of  tlie  principles  suggested.  It  may,  however,  be  per- 
mitted to  take  one  step  in  the  direction  of  formulating  a 
rule  of  wide  application  for  the  financial  conduct  of  a  war, 
bj  which  the  relative  use  to  be  made  of  taxes  and  loans  may 
be  roughly  indicated.  At  the  beginning  of  hostilities,  reve- 
nue from  loans  may  properly  outbalance  revenue  from  taxes, 
but,  as  the  war  progresses  and  the  demands  increase,  taxes 
should  be  continually  forced  into  greater  prominence.  There 
are  several  considerations  that  favor  this  rule.  Thus  the 
necessity  for  temporary  loans  is  always  greater  at  the  begin- 
ning of  a  war  than  at  any  subsequent  period.  As  the  newly 
levied  taxes  become  more  and  more  productive,  and  as  the 
people  become  accustomed  to  high  rates  of  payment,  the 
legitimate  use  of  loans  is  narrowed.  But  the  most  forcible 
reason  favoring  the  rule  is  the  following :  The  greatest 
stress  which  the  advent  of  a  war  throws  upon  industries 
arises  from  the  necessary  re-adjustment  of  labor  to  new  lines 
of  demand.  It  is  this  point  which  is  not  duly  appreciated  by 
writers  upon  finance.  They  do  not  perceive  that  the  strain 
upon  a  treasury  policy  comes  at  the  beginning  of  a  war.  A 
condition  of  war  is  not  a  condition  of  peace  from  any  point 
of  view,  and  the  industrial  transition  from  the  one  to  the 
other  is  always  attended  with  danger  and  may  prove  the 
occasion  of  disaster.  But,  if  the  financier  can  only  bridge 
over  this  chasm  and  establish  business  firmly  on  a  war  basis, 
he  may  extend  his  taxing  system  with  as  much  confidence 
as  if  the  people  were  living  in  a  state  of  profound  peace.  It 
is  during  this  period  of  re-adjustment  tliat  public  credit  ren- 
ders its  greatest  service  to  the  administration.  At  no  future 
time  during  the  continuance  of  a  war  can  such  strong  rea- 
sons be  urged  in  favor  of  its  employment. 

It  seems,  then,  that  the  theory  for  the  administration  of  a 
treasury  during  the  continuance  of  a  war  contemplates,  first, 
the  formation  of  a  financial  policy  at  the  time  when  hostili- 
ties are  first  declared ;  and,  second,  the  development  of  the 
policy  after  industries  are  well  adjusted  to  belligerent  condi- 
tions.    And,  as  has  been  set  forth  in  the  foregoing  analysis, 


140  NATIONAL  DEFICIT  FINANCIERIXG. 

the  formation  of  the  policy  demands  the  legalization  of  three 
fiscal  measures. 

1.  The  rate  of  taxation  in  the  permanent  revenue  system 
must  be  raised.  The  new  income  thus  secured  will  serve  as 
the  basis  of  the  first  loans,  and,  when  relieved  by  other  funds, 
may  be  employed  as  a  contingent  fund  or  as  a  source  of  war 
expenditure.  Nothing  must  be  done  to  endanger  the  repeal 
of  this  measure  upon  a  return  of  peace. 

2.  Xew  sources  of  revenue  must  be  opened  by  the  levy 
of  new  taxes.  The  estimated  proceeds  of  these  taxes  must 
exceed,  if  possible,  the  demands  of  loans  for  interest  pay- 
ment. This  will  assist  in  maintaining  the  credit  of  the 
state,  it  will  give  some  revenue  for  war  purposes  while  hos- 
tilities continue,  and  will  provide  revenue  for  the  expunge- 
ment of  the  debt  when  the  demands  for  war  expenditure 
shall  have  ceased. 

3.  A  large  loan,  equal  to  the  satisfaction  of  all  possible 
demands,  must  be  authorized,  and  the  minister  of  finance 
must  be  granted  large  discretionary  powers  in  its  placement. 
In  this  manner  there  is  created  the  machinery  for  financial 
operations,  and  under  a  strong  administration  there  is  little 
fear  of  failure. 

The  principles  which  control  the  development  of  the 
policy  are  the  same  as  those  which  shaped  its  establishment. 
If  temporary  loans  were  resorted  to,  they  should  be  funded 
upon  the  proceeds  of  the  new  taxes  as  soon  as  possible. 
The  financier  may  hope  for  assistance  from  his  new  taxes 
within  eighteen  months  of  their  levy,  and,  if  demands  con- 
tinue to  expand,  his  call  for  clear  revenue  should  be  gradu- 
ally increased  until  revenue  machinery  be  speeded  to  its 
highest  productive  capacity.  But  there  is  a  limit  to  possible 
war  consumption,  and,  with  a  gradually  increasing  income 
from  taxes,  clear  revenue  must  eventually  overtake  any  pos- 
sible demand. 

This  theory  of  treasury  management  may,  perhaps,  be 
more  clearly  apprehended  if  stated  with  the  assistance  of  the 
following  diagram : 


FINANCIAL  MANAGEMENT  OF  A  WAR. 


141 


In  this  figure  the  horizontal  lines,  in  the  direction  from 
left  to  right,  measure  the  productivity  of  revenue  machinery, 
while  the  perpendicular  distance  from  the  top  represents  the 
time  through  which  it  operates.  Thus  the  line  A  B  shows 
the  intensity  of  the  demand  made  upon  the  permanent  rev- 
enue estabhshraent  in  time  of  peace,  and,  since  the  line  A  J 
covers  one  year's  time,  the  parallelogram  A  ^represents  the 
normal  income  for  a  year.  The  first  measure  upon  the  out- 
break of  a  war  should  be  to  increase  the  rate  imposed  upon  the 
peace  establishment.  Let  it  then  be  increased  by  B  C.  If, 
now,  the  permanent  system  has  been  formed  according  to 
correct  principles,  and  is  elastic  in  character,  this  advance  in 
the  rate  of  imposition  will  yield  increased  revenue;  but, 
since  it  is  necessary  to  properly  advertise  such  a  change,  it  is 
assumed  that  this  addition  to  clear  receipts  will  not  make  its 
appearance  till  the  beginning  of  the  second  year.  It  follows, 
then,  that  the  entire  war  demand  of  the  first  year  must  come 
from  loans.  This  is  represented  in  the  figure  by  the  paral- 
lelogram KB.  There  is  no  danger,  however,  but  that  this 
stock  will  bear  good  prices,  because  it  rests  upon  income  as- 
sured by  revenue  machinery  already  in  operation.  The 
fund,  which  sustains  the  credit  of  the  government  during  the 
first  year,  is  represented  by  the  paraUelograra  K  P,  from 
which  it  appears  that  the  entire  receipts  flowing  from  the 
permanent  establishment  during  the  second  year  is  equal  to 
the  parallelogram  J  P.  During  the  second  year,  also,  the 
newly  established  taxes  begin  to  lend  their  assistance  in  car- 


142  NATIONAL  DEFICIT  FINANCIERING. 

rjing  on  financial  operations,  and  the  income  from  tliis 
source  is  represented  by  tlie  triangle  M  P  W.  This  reve- 
nue is  shown  as  beginning  in  the  middle  of  the  second  year, 
because  it  will  probably  take  eighteen  months  to  bring  an 
entirely  new  system  into  working  order.  It  thus  appears 
that  a  large  share  of  the  extraordinary  expenditure  of  this 
year  also  must  be  secured  from  loans,  which  is  represented 
in  the  diagram  by  the  figure  L  MW R  N.  But  with  the  be- 
ginning of  the  third  year  it  may  be  assumed  that  the  indus- 
trial re-adjustment  has  taken  place,  and  the  financier  may 
constantly  and  persistently  extend  his  demand  for  clear  rev- 
enue ;  and,  since  there  is  a  limit  to  war  consumption,  the 
necessity  of  loans  decreases  with  every  increase  in  clear  rev- 
enue. Thus  the  total  revenue  for  the  third  year  is  repre- 
sented by  the  parallelogram  0  Y,  of  which  clear  revenue 
provides  a  sum  represented  by  the  figure  0  S  V  Wthe  re- 
mainder being  supplied  by  loans.  In  the  fourth  year,  of  a 
total  expenditure  rej^resented  hj  E  Z  T  S,  loans  are  called 
upon  to  furnish  the  comparatively  small  sum  of  Y  H  Z  T. 
It  lies  as  an  essential  part  of  the  treasury  policy  here  de- 
fended that  the  newly  established  system  of  taxation  should 
be  continuously  expanded  until  financial  exigencies  shall 
have  passed  away ;  and  this  may  be  brought  about  either  by 
a  return  of  peace  or  by  the  fact  that  clear  revenue  has 
overtaken  war  demands.  It  is  useless  to  say  that  this  is 
impossible :  it  is  perfectly  feasible,  provided  only  a  strong 
and  vigorous  policy  be  adopted  at  the  beginning  of  the  war. 
The  dijBScult  part  of  the  task  imposed  upon  the  financier  is 
during  the  first  and  second  years  of  the  war.  At  this  time 
there  is  demand  for  wisdom  and  firmness,  for  no  administra- 
tion can  recover  itself  if  it  indulge  in  weakness  and  ineffi- 
ciency at  the  time  when  a  policy  is  set  on  foot. 

Our  conclusion,  then,  respecting  the  appropriate  financial 
policy  for  the  conduct  of  a  war  is  the  following :  Reliance 
can  not  be  placed  wholly  upon  loans  nor  wholly  upon  taxes, 
but  fiscal  administration  should  be  so  adjusted  as  to  gradually 
change  the  burden  of  expenditure  from  credit  to  clear  income. 


CHAPTER  11. 

CLASSIFICATION   OF   PUBLIC   DEBTS. 

The  eminent  Frencli  financier,  M.  Leroy-Beaulieu,  sub- 
mits two  classifications  of  public  debts — the  one  pertaining 
to  tlie  fundamental  cliaracter  of  the  debt,  the  other  to  the 
conditions  of  the  contract.  In  the  former,  the  character  of 
a  debt  is  determined  hj  the  motive  upon  which  the  govern- 
ment relies  for  securing  money ;  in  the  latter,  questions  of 
time,  of  principal,  and  of  interest  present  themselves  for 
consideration.  It  is  my  purpose,  in  the  present  chapter,  to 
follow  out  the  classification  here  suggested,  and  to  call  at- 
tention to  certain  technical  problems  that  naturally  arise  in 
the  course  of  creating  a  great  national  debt. 

Consideration  of  Dehts  as  regards  their  Fundamental  Char- 
acter. 
Our  study  need  not  be  long  detained  by  a  consideration 
of  patri^ic  loans.  They  can  not  form  a  permanent  part  of 
a  financial  policy,  for  the  motive  upon  which  they  rest  is 
spasmodic  and  uncertain  rather  than  steady  and  reliable.  It 
is  true  that  an  administration  may  avail  itself  of  popular 
enthusiasm  for  a  popular  cause,  and  sell  bonds  in  larger 
amounts  or  on  more  favorable  terms  than  would  be  possible 
under  ordinary  circumstances.  Nor  is  it  derogatory  to  the 
dignity  of  the  financier  that  he  avail  himself  of  such  a  state 
of  the  public  mind,  but  he  must  regard  the  conditions  in 
which  this  is  possible  as  a  gratuity  of  fortune,  and  make  his 
appeal  for  assistance  when  popular  enthusiasm  is  at  its  flood, 
for  to  arouse  this  at  will  is  beyond  the  power  of  any  man. 


144  NATIONAL  DEFICIT  FINANCIERING. 

ForcfLd  loans,  as  they  are  known  to  the  science  of  finance, 
rest  upon  the  desire  common  to  all  men  to  escape  a  threat- 
ened evil.  A  full  account  of  this  method  of  filling  a  de- 
pleted treasury  would  make  a  long  chapter  in  financial  his- 
tory, for  plans  of  extorting  money  under  the  guise  of  loans 
are  as  numerous  as  they  are  curious.  Our  present  interest, 
however,  is  confined  to  the  issue  of  legal-tender  notes,  since 
this  is  the  chief  method  of  enforced  borrowing  practiced  by 
modern  governments. 

But  in  what  manner,  it  may  be  asked,  does  an  issue  of 
legal-tender  notes  constitute  a  forced  loan  ?  To  answer  this 
question  it  will  only  be  necessary  to  call  attention  to  the 
manner  in  which  such  notes  are  put  into  circulation.  The 
government  being  in  need  of  commodities,  and  having  no 
money  to  pay  for  them,  goes  upon  the  market,  buys  what  it 
wants,  and  gives  in  return  a  written  promise  to  pay.  So  far 
the  transaction  seems  to  be  one  of  simple  credit.  But  it  should 
be  noticed  that,  if  this  promise  of  the  government  were  a 
simple  note  of  hand,  there  is  no  likehhood  that  dealers  would 
care  to  secure  the  government  as  a  customer.  It  is  essential 
that  dealers  should  receive  such  payment  as  will  enable  them 
to  meet  their  own  business  obligations.  In  order,  then,  to 
relieve  those  individuals  from  embarrassment  who  in  the  first 
instance  supply  the  state  with  goods  or  services,  the  govern- 
ment, acting  in  its  capacity  as  a  sovereign,  attaches  to  its 
notes  the  legal  power  of  paying  private  debts.  Reduced  to 
plain  language,  this  means  that  all  men  must  receive  public 
notes  or  suffer  the  penalty  of  refusal.  The  universal  accept- 
ance of  such  notes  rests  upon  the  fear  which  men  entertain 
of  incurring  the  displeasure  of  the  government ;  for,  by  de- 
claring its  promises  to  be  a  legal-tender  in  payment  of  private 
debts,  the  government  virtually  threatens  to  withdraw  fuU 
protection  in  matters  of  contract  from  every  man  who  refuses 
to  assist  in  floating  its  notes.  As  viewed  by  the  government, 
the  issue  of  these  notes  is  the  placement  of  a  debt,  since  by 
means  of  them  it  secures  immediate  control  over  commodities 
in  return  for  a  promise  of  future  payment ;  as  viewed  by  the 


CLASSIFICATION  OF  PUBLIC  DEBTS.  145 

public,  it  is  the  forced  placement  of  a  debt,  since  no  man, 
unless  be  cboose  to  retire  from  business,  can  elude  tbe  neces- 
sity of  delivering  goods  for  these  notes. 

It  is  no  part  of  the  science  of  finance,  strictly  regarded, 
to  consider  the  argument  against  an  irredeemable  paper 
money,  and  yet  that  argument  is  so  simple  that  it  may  be 
presented  in  a  single  sentence.  It  is  safer,  in  the  long  run, 
to  trust  nature  to  determine  the  proper  amount  of  money 
in  circulation  than  to  place  that  power  in  the  hands  of  any 
legislature.  Especially  during  a  period  of  war,  when  the 
temptation  to  inflate  the  currency  is  the  strongest  because 
the  pressure  upon  the  public  treasury  is  the  heaviest,  should 
the  educated  sentiment  of  a  country  most  strenuously  oppose 
resort  to  such  a  delusive  method  of  financiering.  The  issue 
of  inconvertible  paper  money  is  most  certainly  delusive,  be- 
cause a  redundant  and  local  currency  adds  unnecessarily  to 
public  burdens,  and  because,  resting  upon  the  coercive  power 
of  the  state,  it  in  reality  is  a  tax  under  the  guise  of  a  loan. 

There  is  no  financial  argument  in  favor  of  an  issue  of 
legal-tender  notes  except  the  erroneous  one  that  in  this  man- 
ner the  government  eludes  the  necessity  of  paying  interest 
upon  such  capital  as  it  may  borrow.  It  is  true  that  a  small 
amount  of  convertible  notes  may  be  issued  in  excess  of  the 
coin  held  for  their  redemption,  and  there  is  no  reason  why 
corporations  rather  than  the  public  should  reap  the  advantage 
of  such  an  issue.  But  this  is  quite  a  different  measure  from 
the  collection  of  capital  by  means  of  a  forced  circulation  of 
paper  money.  A  note  convertible  into  coin  need  not  be 
clothed  with  legal  power  of  paying  private  debts,  for  it  read- 
ily passes  by  virtue  of  the  value  it  represents.  Nor  can  there 
be  any  necessity  of  making  treasury  notes  a  legal  tender  ex- 
cept they  be  issued  in  excess  of  the  general  demands  of  trade. 
From  this  it  appears  that,  when  a  government  decides  in 
favor  of  forced  circulation,  it  takes  a  step  leading  inevitably 
to  the  inflation  of  general  prices,  and  to  the  depreciation  of 
its  own  obligations  of  every  sort.  But,  since  all  these  obliga- 
tions must  be  redeemed  in  specie,  the  premium  that  comes 


146  NATIONAL  DEFICIT  FINANCIERING. 

to  the  creditor  at  redemption  amounts  for  all  practical  pur- 
poses to  a  payment  of  interest  on  capital  borrowed. 

Still  it  may  be  urged  tbat  legal-tender  notes  are  prefer- 
able to  bonds  bearing  interest;  for  both  alike  suffer  discount, 
but  by  means  of  the  former  the  treasury  escapes  all  demands 
until  the  government  sees  fit  to  make  payment  of  the  princi- 
pal. Such  a  position  might  be  tenable  were  it  not  that  the 
indirect  evils  entailed  by  an  inflated  currency  more  than 
overbalance  any  relief  that  may  be  experienced  by  avoiding 
the  temporary  payment  of  interest.  The  discount  upon 
bonds,  which  is  here  used  as  an  argument  for  the  issue  of 
notes,  is  in  large  measure  traceable  to  a  lack  of  confidence 
which  a  resort  to  legal-tender  notes  throws  upon  treasury 
administration.  It  is  childish  to  claim,  as  did  Secretary 
Chase,  that  bonds  are  placed  at  par  because  sold  at  par  in 
depreciated  paper.  Bonds  payable  in  specie  must  partake 
of  the  discount  of  the  paper  with  which  they  are  bought. 
It  should  be  held  firmly  in  mind  that  a  resort  to  forced  cir- 
culation is  only  necessary  when  the  circulating  medium  is 
redundant,  and  from  this  it  follows  that  every  new  issue  of 
notes,  inflating  yet  further  the  currency,  will  increase  the 
discount  upon  bonds.  It  is  believed  that  every  sound  prin- 
ciple of  finance  and  economy  stands  opposed  to  the  employ- 
ment of  notes  which  rely  upon  their  legal  power  of  paying 
debts  for  their  ability  to  circulate ;  and,  as  was  shown  in  the 
previous  chapter,  their  use  is  confession  on  the  part  of  the 
administration  of  financial  incompetency. 

Omitting  further  consideration  of  patriotic  and  forced 
loans,  the  administration  may,  in  the  third  place,  rely  on  vol- 
untary loans  as  the  basis  of  all  operations  in  public  credit. 
In  this  case  men  are  induced  to  place  their  capital  at  the  dis- 
posal of  the  government,  because  it  appears  to  them  to  be  a 
profitable  form  of  investment.  This  commercial  motive 
forms  a  good  basis  for  fiscal  transactions,  because  it  is  steady 
and  reliable.  It  is  for  this  reason  that  voluntary  loans  must 
be  accepted  as  the  only  permanent  and  satisfactory  founda- 
tion of  credit  transactions.     Under  the  existinor  condition  of 


CLASSIFICATION  OF  PUBLIC  DEBTS.  14Y 

legal  and  personal  rigLts,  this  is  a  self-evident  financial  truth. 
We  need  not,  therefore,  spend  time  in  arguing  for  voluntary 
loans,  but  may  proceed  at  once  to  consider  various  questions 
that  arise  in  connection  with  the  form  of  contract  entered 
into  between  the  state  and  its  creditors. 

Technical  Questions  pertaining  to  the  Creation  of  a  Debt. 

So  far  as  the  conditions  of  the  contract  are  concerned, 
public  debts  may  be  either  floating  or  funded.  That  which 
distinguishes  the  one  from  the  other  is  perhaps  rather  the 
grade  of  the  obligation,  considered  as  commercial  paper,  than 
any  peculiar  wording  of  the  contract.  All  floating  debts, 
and  there  are  many  sorts,  lack  the  essential  element  of  first- 
class  commercial  paper ;  they  do  not  bear  uj^on  their  face  evi- 
dence of  their  own  genuineness ;  they  are  not  negotiable, 
but  are  of  the  nature  of  running  accounts  any  item  of  which 
may  be  contested.  Due-bills,  warrants,  commissary  certifi- 
cates, orders  from  the  general  of  an  army  upon  the  treasury, 
such  are  the  sorts  of  obligations  that  go  to  make  up  a  float- 
ing debt.  It  is  true  that  speculators  may  buy  such  accounts, 
but  the  government  retains  the  right  of  investigating  each 
particular  claim.  This  is  not  tme  of  a  funded  debt.  When 
the  government  has  placed  a  bond,  it  no  longer  retains  the 
reserved  right  of  making  inquiry  concerning  the  service 
rendered.  A  bond  is  itseK  evidence  of  a  valid  claim,  and 
the  language  in  which  it  is  written  expresses  the  extent  and 
nature  of  that  claim. 

May  the  minister  of  finance  consider  favorably  the  em- 
ployment of  floating  debts  ?  One  can  not  reply  that  float- 
ing obligations  are  wholly  at  variance  with  the  requirements 
of  sound  financiering,  for  many  cases  arise  in  the  administra- 
tion of  a  public  treasury  when  their  use  is  absolutely 
imperative.  For  example,  during  the  prosecution  of  a  war  it 
frequently  becomes  necessary  for  tlie  commissariat  to  issue 
warrants  in  payment  for  supplies,  or  for  a  commanding  general 
to  write  an  order  upon  the  treasurer  in  payment  for  horses 
impressed  into  the  service.     In  ordinary  peace  administra- 


148  NATIONAL  DEFICIT  FINANCIERING. 

tion,  also,  temporary  debts  are  frequently  necessary  for  the 
settlement  of  claims  and  running  accounts. 

But,  though  floating  indebtedness  may  not  be  wholly 
avoided,  the  leanings  of  an  administration  should  be  always 
toward  funded  obligations.  Many  reasons  might  be  pre- 
sented in  favor  of  this  rule.  Thus,  for  equal  amounts,  a 
floating  debt  rests  more  heavily  upon  public  credit  than  a 
funded  debt,  because  of  the  uncertainty  and  confusion 
which  it  is  likely  to  introduce  into  public  accounts. 

Again,  for  equal  amounts  of  commodities  secured,  it  is 
more  expensive  to  deal  with  floating  than  with  funded  debts, 
and  the  rate  of  final  expense  increases  with  the  age  of  the 
obUgations.  Tlie  explanation  of  this  is  that,  when  a  man 
has  a  claim  upon  a  government,  he  is  apt  to  put  it  as  high  as 
possible,  and  the  longer  this  claim  runs  without  being  ad- 
justed, the  more  extended  will  be  his  demands.  His  mem- 
ory will  probably  hold  firmly  all  the  facts  in  his  own  favor, 
while  the  longer  the  time  intervening  between  the  service 
and  the  settlement,  the  more  difiicult  wiU  it  be  to  secure 
rebutting  testimony.  Or,  if  one  consider  such  floating 
debts  as  arise  from  army  impressments,  where  an  estimate  of 
'the  amount  due  is  made  at  the  time  goods  are  taken,  it  can 
not  be  denied  that  the  price  paid  will  be  higher  than  if  the 
commodities  had  been  bought  with  cash  in  open  market. 
Or,  were  we  to  consider  municipal  and  local  financiering,  the 
reasons  against  the  use  of  floating  debts  would  appear  in  a 
yet  stronger  light ;  but  sufficient  has  been  said  to  lead  to  the 
conclusion  that  sound  financiering  inclines  always  toward 
funded  obligations,  and  will  liquidate  floating  accounts  with 
all  possible  speed. 

Passing,  then,  to  a  consideration  of  funded  obligations, 
the  completed  classification  of  debt  paper  is  suggested  by 
the  two  following  questions : 

Is  there  any  mention,  in  the  contract,  of  the  sum  of  money 
given  over  to  the  government  at  the  time  the  obligation 
was  created  ?  If  there  is  no  such  mentioned,  and  the  con- 
tract is  simply  a  promise  to  pay  yearly  or  periodically  a  stated 


CLASSIFICATION  OF  PUBLIC  DEBTS.  I49 

sum,  the  debt  is  regarded  as  an  annuity ;  if,  on  the  other 
hand,  there  is  such  a  mention,  and  he  who  buys  the  evi- 
dence of  debt  buys  the  right  to  reclaim  the  amount  origi- 
nally paid,  together  with  an  annual  payment  of  interest,  the 
form  of  the  obligation  is  that  of  a  common  note,  called  by 
various  names  in  various  countries.  In  this  essay  such  notes 
are  termed  bonds. 

The  second  question  asks  if  the  contract  states  when  the 
debt  must  be  paid ;  and,  provided  such  a  statement  exists, 
whether  a  definite  time  is  mentioned  for  such  payment 
and  definite  conditions  prescribed,  or  whether  the  whole 
matter  of  reimbursement  is  left  to  the  choice  of  the  govern- 
ment. This  consideration  of  time  shows  annuities  to  be 
of  three  sorts :  those  drawn  to  lapse  at  some  specific  time, 
called  terminable  annuities ;  those  drawn  to  lapse  at  the 
death  of  the  annuitant  or  some  stated  number  of  his  as- 
signees, called  life  annuities ;  and  those  drawn  to  run  in 
perpetuity,  or  perpetual  annuities.  Bonds  also  may  be  drawn 
so  as  to  establish  what  are  technically  known  as  time  debts, 
or  perpetual  debts  ;  but  so  various  are  the  other  conditions 
to  which  they  conform  that  it  will  be  more  satisfactory  to 
allow  their  further  classification  to  emerge  from  a  discussion 
of  certain  technical  questions  that  always  arise  in  the  course 
of  contracting  a  debt. 

I.  Shall  the  financier  strive  for  uniformity  or  admit  of 
variety  in  the  placement  of  debt-jyaper  f 

This  is  the  first  question  that  arises  in  the  establishment 
of  a  debt  system.  It  may  be  well  to  remark  at  the  begin- 
ning that  complete  uniformity  is  impossible.  Under  certain 
conditions,  floating  debts  must  be  made  use  of,  and  there  is 
no  reason  to  suppose  that  in  the  placement  of  funded  obliga- 
tions the  same  conditions  will  always  continue.  In  the  pre- 
vious chapter  it  was  shown  that,  during  the  prosecution  of  a 
war,  the  character  of  the  financial  problem  changed  with 
every  successive  year ;  how,  then,  may  one  hope  that  the  sort 
of  debt  paper  most  highly  successful  under  one  set  of  con- 
ditions wiU  serve  equally  well  for  other  circumstances? 
11 


150  NATIONAL  DEFICIT  FINANCIERING. 

The  advocates  of  uniformity  would  probably  admit  of  so 
much  variety  as  is  here  suggested,  but  would  argue  for  a  uni- 
form consolidated  debt.  Their  defense  of  such  a  conclusion 
would  be  that  diversity  of  debt  paper  introduces  confusion 
and  obscurity  into  piiblic  accounts,  and  in  consequence 
weighs  heavily  upon  public  credit.  As  stated  by  an  Ameri- 
can writer,  "  A  public  debt,  to  command  confidence,  should 
be  simple  in  its  plan,  easily  understood,  of  one  kind,  and 
without  contingencies."  ^  This  seems  to  be  one  of  those 
cast-iron  rules  so  frequently  promulgated  by  men  who  look 
only  on  one  side  of  a  question.  A  guarded  variety  in  pub- 
lic obligations  tends  to  strengthen  public  credit,  because  it 
permits  the  financier  to  conform  to  the  differing  needs  of 
money  lenders.  To  adopt  the  strict  rule  of  uniformity 
would  show  the  same  disregard  of  business  principles  as  if 
a  merchant  should  keep  on  hand  but  one  pattern  of  calico. 
Moreover,  it  is  a  mistake  to  suppose  that  variety  necessarily 
throws  public  accounts  into  confusion.  It  may  be  carried  so 
far  as  to  introduce  complexity,  and  give  rise  to  a  want  of 
confidence.  Previous  to  1870  the  finances  of  the  United 
States  were  open  to  this  criticism.  There  were  at  that  time 
twelve  sorts  of  notes  bearing  6  per  cent  interest,  five  different 
kinds  of  five-per-cent  notes,  and  five  sorts  of  7-30's.  An  ex- 
treme application  of  the  principle  of  variety  like  this  should 
be  avoided,  but  the  policy  of  granting  the  minister  of 
finance  no  latitude  would  frequently  force  him  to  close  with 
bargains  less  advantageous  to  the  government  than  the  ne- 
cessities of  the  case  require.  A  moderate  variety  of  debt 
paper,  therefore,  may  be  admitted  into  a  good  debt  system  ; 
for  by  meeting  the  known  wants  of  the  several  classes  of  in- 
vestors the  market  for  stock  will  be  extended,  and  the  com- 
petition among  buyers  will  tend  to  raise  the  credit  of  the 
government. 

II.  Which  form  of  contract  is  the  more  advantageous  to 
the  public — one  that  hinds  th^  government  to  an  annual pay- 

'  J.  S.  Gibbons,  "  The  Public  Debt  of  the  United  States,"  p.  25. 


CLASSIFICATION  OF  PUBLIC  DEBTS.  151 

ment  of  a  definite  amount,  or  one  that  calls  for  interest-pay- 
ments until  reimhursement  of  the  sum  originally  borrowed  f 

This  question  brings  into  comparison  the  relative  claims 
of  annuities  and  bonds.  In  the  seventeenth  and  eighteenth 
centuries  annuities  were  quite  generally  defended  by  finan- 
cial writers  and  adopted  by  governments.  This  followed 
naturally  from  the  system  of  economic  thought  then  preva- 
lent, which  taught  that  the  payment  of  interest  upon  a  debt 
held  within  a  country  could  not  possibly  be  the  source  of 
injury  to  the  people.  There  are  many  expressions  of  this 
opinion  to  be  found  in  the  writings  of  the  times.^  Accord- 
ing to  Pinto,  public  debts  increased  national  wealth  by  the 
whole  of  the  capital  which  they  represented.  Bishop  Berke- 
ley called  public  debts  a  mine  of  gold.  Melon,  who  was  a 
Mercantilist  writer  of  importance,  regarded  the  payment  of 
interest  entailed  by  a  public  debt  as  passing  money  from  the 
right  hand  into  the  left.  Voltaire  declared  that  no  people 
could  become  impoverished  who  paid  interest  only  to  them- 
selves. Under  the  direction  of  such  ideas  it  is  no  occasion 
for  surprise  that  annuities  should  have  been  preferred  to 
ordinary  bonds.  By  means  of  them  the  government  secured 
a  large  sum  of  disposable  capital  on  the  basis  of  a  slight  in- 
crease of  the  tax-levy ;  and,  so  long  as  the  creditors  remained 
citizens  of  the  debtor  state,  it  was  thought  that  a  people  could 
not  be  impoverished  by  the  annual  payments.  But  at  pres- 
ent this  old  theory  of  public  debts  has  been  abandoned.  It 
is  now  admitted  that  the  distribution  of  wealth  within  a 
country  is  of  as  much  importance  to  its  public  economy  as 
the  possession  of  wealth ;  and,  since  it  has  been  recognized 
that  the  payment  of  an  annuity  out  of  taxes  is  the  payment 
from  one  set  of  citizens  to  another,  the  whole  question  of 
public  obligations  is  thrown  into  a  different  light.  It  is  these 
clearer  ideas  with  respect  to  interest-payments  that  have  de- 
prived annuities  of  their  strongest  defense. 

But  the  chief  argument  against  annuities  is  found  in  the 

»  "Traite  de  la  Science  dcs  Finances,"  Leroy-Beaulieu,  vol.  ii,  p.  199. 


152  NATIONAL  DEFICIT  FINANCIERING. 

fact  that  a  contract  of  tliis  form  once  delivered  lies  beyond 
the  control  of  the  government.  It  can  not  be  re-adjusted  to 
conform  to  changed  conditions  of  the  money  market.  There 
are  two  ways  in  which  this  fact  subjects  a  government  em- 
ploying annuities  to  loss.  In  the  first  place,  annuities  do  not 
permit  any  reduction  in  the  rate  of  interest  paid  in  case  the 
market  price  for  money  falls  below  the  price  at  which  the 
debt  was  originally  contracted.  Had  the  debt,  on  the  other 
hand,  been  drawn  in  the  form  of  a  bond,  any  fall  in  the  price 
that  must  be  paid  for  money  would  have  permitted  the  gov- 
ernment to  place  a  new  loan  at  reduced  rates,  and  with  its 
proceeds  to  have  extinguished  the  old  debt.  This  would 
have  occasioned  a  direct  saving  equal  to  the  difference  in 
annual  payments  required ;  but  the  government  that  makes 
use  of  annuities  when  creating  a  new  debt  is  deprived  of  the 
opportunity  of  such  saving. 

The  second  loss  entailed  by  annuities  (we  here  consider 
perpetual  annuities  only)  makes  its  appearance  when  a  gov- 
ernment undertakes  to  extinguish  its  obligations.  A  perma- 
nent annuity  can  only  be  paid  by  purchase  on  the  market, 
and  the  price  demanded  will  be  equal  to  the  capitalization 
of  the  yearly  payment,  computed  on  the  basis  of  the  current 
interest.  It  follows  from  this  that,  in  case  money  falls  in 
value,  the  price  of  an  annuity  must  rise  in  a  corresponding 
degree,  and  the  government  that  undertakes  to  free  itself 
from  debt  will  be  under  the  necessity  of  paying  a  premium 
for  every  annuity  purchased.  Had  the  debt  been  contracted 
in  the  form  of  a  bond,  the  loss  occasioned  by  the  payment 
of  this  premium  would  not  have  been  entailed.  It  is  for 
these  reasons  that  annuities  have  been  quite  generally  aban- 
doned as  a  means  of  placing  new  loans.^ 

*  The  facts  here  presented  may  be  rendered  perfectly  clear  by  a  comparison 
of  the  following  cases : 

Case  I. — A  government  borrows  $20,000,  in  the  form  of  bonds,  at  5  per 
cent  interest;  the  yearly  payment  would  then  be  $1,000.  Suppose  the  rate  of 
interest  falls  so  that  the  bonds  may  be  converted  into  three-per-cents,  the  yearly 
payment  falls  to  $600,  and  the  annual  saving  to  the  public  is  $400,  the  principal 
remaining  unchanged. 


CLASSIFICATION  OF  PUBLIC  DEBTS.  153 

III.  What  may  he  said  respecting  the  element  of  time  as 
a  factor  in  credit  contracts  f 

A  consideration  of  the  element  of  time  introduces  a  vast 
variety  of  debt  paper.  The  study  of  the  present  paragraph, 
which  pertains  altogether  to  bonds  as  distinguished  from 
annuities,  will  bring  to  our  attention  the  following  species 
of  obligations :  Temporary  debts,  perpetual  debts,  debts  pay- 
able at  the  expiration  of  a  specified  period,  limited-option 
debts,  and  debts  payable  by  installments.  It  should  be  re- 
marked that  these  stipulations  regarding  time  of  payment 
pertain  to  the  principal  rather  than  the  interest  of  the  obliga- 
tions, and  also  that  a  contract  may  prohibit  a  government 
from  payment  as  well  as  grant  creditors  the  right  of  demand- 
ing reimbursement. 

There  is  no  strict  rule  according  to  which  a  temporary 
debt  may  be  defined.  A  deposit  payable  at  ten  days'  notice 
is  certainly  a  temporary  obligation,  while  a  bond  running 
forty  years  will  be  denied  that  character ;  but  at  what  point 
the  one  passes  into  the  other  it  is  difficult  to  say  with  assurance. 
It  seems  that  this  question  ought  to  be  decided  differently 
for  different  countries,  according  to  the  organization  of  their 
respective  governing  bodies.  In  general,  a  debt  that  calls 
for  payment  by  the  administration  that  incurs  the  obliga- 
tion may  be  termed  a  temporary  debt ;  while  one  that  out- 
lasts the  most  radical  changes  in  the  actual  governing  body  for 

Case  II. — A  government  borrows  $20,000,  in  the  form  of  annuities,  when 
interest  is  5  per  cent.  Assuming  the  annuity  to  be  perpetual,  the  amount  to 
be  annually  paid,  and  which  is  specifically  stated  in  the  contract,  may  be  as- 
sumed to  be  $1,000.  In  case  interest  falls  to  3  per  cent,  the  government 
must  continue  to  pay  each  year  $1,000.  Thus  the  first  loss  sustained  by  the 
state  is  the  opportunity  of  saving  annually  $400.  The  second  loss  makes  its 
appearance  when  the  government  undertakes  to  purchase  its  own  obligations  for 
the  purpose  of  extinguishing  the  debt,  for  an  annuity  at  any  time  would  be 
worth  its  capitalized  sum  at  the  current  rate  of  interest.  That  is  to  say,  an 
annuity  of  $1,000,  when  interest  is  at  3  per  cent,  would  be  worth  $33,333. 
Thus,  in  addition  to  the  lost  opportunity  of  lightening  the  burden  of  the  debt 
while  it  lasts,  there  is  to  be  reckoned  the  actual  loss  of  $13,333,  which  must  be 
drawn  from  the  proceeds  of  taxes  in  order  to  pay  the  bond,  in  excess  of  the  sum 
originally  borrowed. 


154:  NATIONAL  DEFICIT  FINANCIERING. 

wMcli  the  constitution  provides  can  not  properly  be  so  classi- 
fied. Upon  the  basis  of  this  distinction,  it  appears  that  the 
extreme  limit  of  a  temporary  loan  in  the  United  States 
would  be  four  years  ;  not  alone  because  the  executive  must 
be  changed  once  in  four  years,  but  also  because  it  will  prob- 
ably require  that  time  for  any  radical  modification  in  public 
sentiment  to  find  its  way  into  the  composition  of  Congress. 
So  far  as  I  am  aware,  this  country  has  never  put  out  a  four- 
year  bond,  her  temporary  loans  having  varied  from  deposits 
on  call  to  three-year  credit  paper. 

But  what  is  the  meaning  of  temporary  obligations,  and 
when  may  they  be  propeiiy  employed  ?  There  are  t^ree  in- 
terpretations that  may  be  given  to  them,  and  three  sets  of 
conditions  that  justify  their  use.  Thus,  temporary  debts  may 
be  systematically  employed  by  an  administration  that  has 
adopted  the  policy  of  deficit  rather  than  surplus  estimates ; 
they  may  be  properly  resorted  to  when  a  tax-loan  is  to  be  is- 
sued ;  and  they  may  be  also  used,  though  with  great  caution, 
to  make  headway  against  the  first  stress  of  a  sudden  emer- 
gency. 

Attention  was  called  in  a  former  chapter  to  the  evil  con- 
sequences that  flow  from  administering  a  public  treasury  in 
the  presence  of  surplus  revenue,  and  the  conclusion  was 
there  reached  that  the  appearance  of  a  constant  deficit  in 
annual  appropriations  may  be  evidence  of  close  estimates, 
and  not  of  bad  financiering.^  It  was  also  pointed  out  that 
the  danger  in  ordinary  deficit  financiering  lay  in  the  tempta- 
tion, which  must  certainly  present  itseK,  of  funding  instead 
of  paying  the  obligations  so  incurred.  To  guard  against  the 
growth  of  permanent  claims,  it  should  stand  as  an  invariable 
rule  that  the  principle  of  temporary  indebtedness  must  at- 
tach to  all  financial  operations  of  this  sort.  It  is  true  that 
this  policy  contemplates  the  constant  creation  and  constant 
expungement  of  public  obligations,  but  one  who  objects  to 
it  for  this  reason  does  not  understand  its  claims.     The  funda- 

'  Of.  ante,  p.  80. 


CLASSIFICATION  OF  PUBLIC  DEBTS.  155 

mental  truth  upon  which  it  rests  is  that,  in  the  long  run, 
income  from  taxes  must  meet  expenditure,  but  that  there 
will  probably  be  temporary  discrepancies  leading  to  deficits. 
These  deficits  might  be  obviated  by  underestimating  revenue, 
but  both  analysis  and  experience  declare  such  a  decision  to 
be  unwise.  It  is  better  to  make  estimates  close,  and  borrow 
to  cover  any  discrepancy.  In  reality,  therefore,  the  policy 
of  temporary  debts,  which  is  here  advocated,  is  merely  a  sys- 
tematic method  of  throwing  the  deficit  of  one  year  on  to 
the  surplus  of  another;  and  if  adequate  provision  for  the 
debts  of  any  given  year  be  made  in  the  ensuing  estimates, 
the  benefits  of  deficit  financiering  will  be  secured,  while  the 
country  incurs  no  danger  of  a  constantly  growing  debt.  It 
is  then  possible  to  interpret  the  presence  of  temporary 
debts,  as  evidence  of  close  appropriations  and  accurate  esti- 
mates, and  one  may  rest  assured  that,  when  they  are  thus 
employed  in  the  interest  of  good  budgetary  financiering, 
the  saving  in  estimates  will  more  than  balance  the  slight  pay- 
ment which  they  entail  in  the  form  of  interest. 

Those  temporary  debts  called  "tax-loans"  may  perhaps 
be  the  best  understood  through  the  analogy  of  common  bills 
of  exchange.  The  meaning  of  a  mercantile  bill  is,  that  goods 
capable  of  discharging  the  sum  declared  due  are  on  their 
way  to  the  consumer ;  and  that,  upon  the  final  sale  of  such 
goods,  a  fund  is  established,  from  which  all  claims  arising  in 
the  course  of  then*  production  may  be  at  last  settled.  Thus, 
a  bin  is  evidence  of  a  claim  upon  the  proceeds  of  a  sale.  To 
discount  a  bill,  therefore,  is  to  anticipate  payment  from  a 
fund  that,  in  the  ordinary  course  of  trade,  is  sure  to  arise. 
In  like  manner  the  placement  by  the  government  of  a  tax- 
loan  is  the  method  which  it  adopts  of  discounting  assured 
revenue.  The  only  purpose  of  such  a  loan  is  to  anticipate 
a  specific  income.  The  principal  of  such  debts  can  not  be 
greater  than  the  sum  which  must  shortly  accrue  to  the  pub- 
lic treasury,  otherwise  they  loose  the  essential  characteristic 
of  tax-loans. 

The  financial  records  of  the  United  States  offer  no  more 


156  NATIONAL  DEFICIT  FINANCIERING. 

perfect  example  of  obligations  of  this  sort  than  is  presented 
by  the  direct  tax-loan  of  1815.^  It  will  be  remembered  that 
the  endeavor  to  carry  on  the  war  of  1812  without  directly 
appealing  to  the  resources  of  the  country  had  at  this  time 
been  confessed  a  failure ;  and  that  Mr.  Dallas,  who  was 
called  into  the  cabinet  as  Secretary  of  the  Treasury,  pro- 
posed a  vigorous  system  of  taxation.^  But  the  pressing 
needs  of  the  government  could  not  wait  the  ordinary 
course  of  newly-levied  taxes  ;  a  loan,  therefore,  of  $6,000,000 
was  authorized,  and  the  contract  declared  that  this  sum 
should  be  paid  out  of  the  first  proceeds  of  the  direct  tax. 
Here  is  presented  the  true  character  of  a  tax-loan :  it  must 
be  temporary  ;  indeed,  it  is  not  understood  until  recognized 
as  a  subordinate  part  of  a  system  of  taxation.  An  adminis- 
tration will  seldom  find  itself  in  circumstances  calling  for  its 
use,  but  it  may,  under  certain  conditions,  be  of  great  assist- 
ance to  the  minister  of  finance.^ 

In  the  third  place,  temporary  debts  may  be  regarded  as 
indicating  that  the  administration  has  experienced  some  un- 
usual demand  for  money,  which  it  believes  to  be  of  a  transi- 
tory nature.  This  may  result  from  a  deficit  in  the  accus- 
tomed revenue,  traceable  to  some  passing  disorder  in  com- 
mercial relations ;  or  it  may  arise  from  the  necessity  of 
providing  immediately  for  some  extraordinary  service.  In 
either  case,  the  considerations  that  favor  the  use  of  tempo- 
rary loans  vary  with  the  strength  of  the  expectation  that 
the  demand  will  be  transitory.  The  arguments  which  favor 
this  conclusion  have  been  already  presented.  Sudden  changes 
in  the  established  tax-rates  are  undesirable;  running  accounts 
and  unsettled  claims  are  in  the  highest  degree  pernicious ; 

1  January  9th.  2  Cf.  ante,  p.  123. 

*  The  same  principle  applies  if  the  loan  anticipates  any  other  source  of  reve- 
nue than  that  arising  from  taxes.  For  example,  in  1814  (March  31)  bonds  were 
issued  to  indemnify  certain  claimants  of  public  lands  in  the  Mississippi  territory, 
which  were  redeemable  out  of  the  proceeds  arising  from  the  sales  of  such  lands, 
after  necessary  public  expenses  had  been  covered.  There  are,  however,  but 
few  instances  in  which  the  United  States  government  has  mortgaged  specific 
revenue  for  specific  obligations. 


CLASSIFICATION  OF  PUBLIC  DEBTS.  I57 

long-time  debts  are  unnecessary ;  short-time  obligations  are 
all  that  remain  to  the  financier,  and  fit  well  the  demands  of 
good  treasury  management. 

Still,  the  financier  should  recognize  that,  in  emj)loying 
temporary  obligation  under  such  circumstances,  he  stands 
upon  dangerous  ground,  for  he  is  calculating  upon  a  future 
that  is  quite  uncertain.  All  debts  contracted  to  make  head- 
way against  sudden  demands  should  be  di-awn  so  as  to  out- 
last the  emergency  that  calls  them  forth.  As  an  illustration, 
the  expenditure  occasioned  by  an  Indian  war  might  well  be 
met  by  paper  running  two  or  three  years,  for  such  a  war 
could  not  possibly  encroach  upon  the  resources  of  the  treas- 
ury, and  there  is  little  danger  that  it  would  lead  to  foreign 
complications.  But,  when  half  the  people  rise  in  revolt,  or 
when  a  quarrel  touching  the  interests  of  Em'opean  states  is 
forced  upon  the  administration,  it  is  not  wise  to  rely  too  con- 
fidently upon  a  speedy  termination  of  difiicuties.  The  use 
which  Mr.  Chase  made  of  temporary  debts  at  the  beginning 
of  the  late  war  is  open  to  just  criticism.  In  the  first  nine 
months  of  his  administration  there  were  received  into  the 
public  treasury,  to  the  account  of  loans,  $192,200,000,  and  of 
this  amount  only  $45,700,000  was  contracted  on  sufficiently 
long  time  to  outlast  the  war.  Two  loans  of  $50,000,000  each 
fell  due  just  when  the  pressure  upon  the  public  treasury  was 
the  most  severe — the  one  upon  August  19,  1864,  the  other 
upon  October  1  of  the  same  year.  It  needs  no  remark  to 
show  that  the  unwillingness  of  the  administration  to  recog- 
nize that  it  had  a  war  on  its  hands  constrained  the  Secretary 
to  press  unduly  the  claims  of  temporary  debts,  and  to  un- 
necessarily complicate  the  financial  problem  with  which  he 
was  obliged  to  deal. 

Assuming,  then,  that  temporary  obligations  may  with 
propriety  -be  employed,  their  purpose  will  perhaps  be  best 
served  by  treasury  notes  bearing  a  low  rate  of  interest.  The 
presence  in  the  community  of  a  moderate  amount  of  such 
paper,  which  may  quickly  and  quietly  be  bought  and  sold, 
is  of  great  commercial  convenience,  and  this  fact  insures  its 


158  NATIONAL  DEFICIT  FINANCIERING. 

acceptance  upon  favorable  terms.  These  notes,  however, 
should  be  so  drawn  as  to  serve  the  purpose  of  banking  paper 
and  temporary  investments,  and  should  never  be  of  such 
small  denominations  as  to  find  their  way  into  retail  transac- 
tions. The  reason  for  this  is  that  the  administration  would 
otherwise  incur  the  danger  of  injuriously  affecting  the  cir- 
culating medium  of  the  country  by  means  of  its  treasury 
operations.  Subject  only  to  this  restriction,  public  conven- 
ience should  determine  the  form  of  treasury  notes,  for  the 
wider  the  market  which  they  find,  the  greater  is  the  assist- 
ance which  they  are  able  to  lend  in  supporting  the  credit  of 
the  government.  Thus,  certain  United  States  notes,  issued 
during  the  late  war,  were  charged  with  7*30  per  cent  inter- 
est, because  that  rate,  computed  upon  a  note  of  $50,  amounts 
to  one  cent  per  day ;  their  circulation,  therefore,  was  not  ob- 
structed by  cumbersome  calculations  of  interest.  These  notes 
could  change  hands  twenty  times  a  day  without  calling  for 
a  set  of  interest-tables.  It  is  quite  common,  also,  to  clothe 
treasury  notes  with  the  power  of  paying  government  dues. 
This  certainly  assists  in  securing  for  them  an  extended  cir- 
culation, for  under  such  a  stipulation  they  partake  of  the 
character  of  a  tax-loan.  Indeed,  the  only  difference  is  that 
treasury  notes  receivable  for  taxes  are  accredited  to  general 
taxes  rather  than  to  a  special  tax.  These  minor  points  can 
not  be  with  safety  overlooked  by  the  financier  who  would 
attain  the  highest  success  as  a  fiscal  administrator. 

It  is  not,  however,  necessary  to  rely  upon  treasury  notes 
as  the  only  form  of  temporary  debts.  It  may  be  advanta- 
geous for  an  administration  to  accept  money  as  deposits  on 
call,  or  at  short  notice,  and  pay  therefor  a  low  rate  of  inter- 
est. At  one  time  during  the  administration  of  Secretary 
Chase  the  government  was  responsible  for  obligations  of  this 
sort  amounting  to  more  than  $100,000,000.  Much  may  be 
said  in  favor  of  such  a  measure,  especially  if  the  government 
unite  under  its  direction  the  policy  of  deficit  financiering 
and  the  control  of  a  national  bank.  For,  under  such  circum- 
stances, deposits  in  the  public  bank  might  be  used  to  cover 


CLASSIFICATION  OF  PUBLIC  DEBTS.  159 

running  deficits,  and  the  government  would  thus  be  enabled 
to  discount  its  own  bills.  The  important  question  for  the 
financier  who  accepts  deposits  on  call  pertains  to  the  rate  of 
interest  that  should  be  paid.  Without  entering  into  a  dis- 
cussion of  the  relation  that  exists  between  a  public  bank  and 
private  banks,  it  may  be  said  that  this  rate  should  never  be 
so  high  as  to  draw  capital  from  ordinary  business  invest- 
ments, or  to  throw  upon  the  hands  of  the  government  more 
money  than  can  be  used  in  the  ordinary  course  of  its  business. 
And  from  this  it  follows  that  the  treasury  authorities  should 
retain  the  right  to  change  at  will  the  rate  of  interest  paid, 
for  it  would  otherwise  be  impossible  to  regulate  the  amount 
of  money  charged  against  the  state  as  temporary  obligations. 

The  general  principles  that  should  control  in  the  admin- 
istration of  temporary  indebtedness  have  been  presented  in 
the  foregoing  discussion.  So  far  as  the  United  States  is  con- 
cerned, with  its  policy  of  commercial  isolation  realized  in  the 
independent  treasury,  and  with  its  policy  of  surplus  finan- 
ciering, springing  directly  from  the  desire  for  industrial  pro- 
tection, the  question  of  temporary  debts  is  of  no  importance 
except  when  the  administration  is  pressed  by  some  great  finan- 
cial emergency.  That  is  to  say,  this  country  has  made  the 
most  use  of  temporary  obligations  at  that  time  when  their 
use  is  the  most  dangerous,  and  has  refrained  from  appealing 
to  them  under  those  conditions  when  their  employment 
would  be  of  the  most  marked  assistance  in  the  administration 
of  public  finances. 

As  distinguished  from  temporary  obligations,  stand  those 
debts  so  drawn  as  to  continue  for  some  considerable  time. 
Here  are  introduced  for  our  consideration  debts  which  run  in 
perpetuity,  as  well  as  those  which  become  redeemable,  or  de- 
mand payment,  at  some  specific  date.  One  should  not  be 
misled  by  the  expression  perpetual  debt.  Such  an  obliga- 
tion is  not  one  that  can  only  be  extinguished  by  purchase, 
but  rather  one  whose  contract  mentions  no  time  at  which 
payment  may  be  demanded,  and  fails  to  guarantee  the  in- 
vestor against  repayment  of  the  principal  for  any  definite 


160  NATIONAL  DEFICIT  FINANCIERING. 

period.  Reference  may  be  made,  for  purpose  of  illustration, 
to  tlie  tliree-per-cent  stock  created  by  the  first  Congress  to 
assist  in  refunding  the  Revolutionary  debt.  This  stock  was 
made  redeemable  at  the  pleasure  of  the  government,  and  con- 
sequently conformed  to  the  requirements  of  a  perpetual  debt. 
Other  instances  of  debts  drawn  upon  this  model  are  quite 
rare.  Indeed,  one  is  warranted  in  saying  that  perpetual 
debts  pure  and  simple  belong  to  Federalist  administration, 
for  since  1801  there  are  but  three  instances  of  loans  of  this 
sort. 

From  the  time  when  the  first  Republican  party  came  to 
power  until  the  second  Republican  party  assumed  control  of 
the  ISTational  government,  an  altogether  different  principle 
seems  to  have  controlled  in  fashioning  debt  contracts.  The 
obligations  of  this  period  stipulate  that  the  creditors  shall,  for 
a  stated  number  of  years,  be  secure  in  the  enjoyment  of  their 
investments,  but  that  at  the  expiration  of  this  period  the 
debt  shall  become  redeemable  at  the  pleasure  of  the  govern- 
ment. For  the  most  part,  the  date  at  which  the  bonds 
become  re-imbursable  is  stated  in  the  text  of  the  law 
which  authorized  them ;  as,  for  example,  the  loan  of  1848 
was  declared  to  be  re-imbursable  at  any  time  after  twenty 
years.  There  are,  however,  variations  from  this  most  simple 
form  of  contract.  Thus,  the  law  authorizing  the  six-per-cent 
loan  of  1816  forbade  the  administration  to  enter  into  any 
engagement  or  contract  which  should  preclude  payment  at 
any  time  after  December  31,  1827.  In  such  a  case  as  this, 
the  empowering  act  names  the  most  extreme  date  for  which 
Congress  deems  it  advisable  to  sign  away  its  privilege  of 
redemption ;  and  the  financier,  understanding  the  spirit  of 
the  law,  should  endeavor  to  make  the  actual  time  agreed 
upon  less  than  the  limit  granted.  From  one  point  of  view 
this  is  an  advantageous  way  of  placing  a  debt,  for  it  gives 

1  These  cases  are :  A  loan  of  $7,000,000  authorized  April  10,  1816  ;  a  loan 
of  $3,000,000  authorized  May  20,  1820;  and  certain  stock  issued  in  lieu  of 
"  bounty-land  scrip  "  to  the  soldiers  of  the  Mexican  war.  Cf.  Act  of  February 
11,  1847,  sec.  9. 


CLASSIFICATION  OF  PUBLIC  DEBTS.  161 

the  administration  an  opportunity  to  fasMon  its  obligations 
to  the  expressed  wishes  of  customers ;  but  the  variety  of 
debt  paper  which  must  in  this  manner  be  introduced,  leading 
to  complexity  of  accounts,  will  more  than  counterbalance  any 
such  advantages. 

But,  returning  to  the  question  first  suggested :  "WTiat  is  the 
essential  difference  between  a  bond  re-imbursable  from  the 
date  of  its  issue  and  one  the  redemption  of  which  is  denied 
for  ten  or  twenty  years  ?  This  distinction,  which  upon  its 
face  appears  to  be  very  slight,  is  one  of  the  most  funda- 
mental that  presents  itself  in  the  entire  course  of  credit 
operations.  It  can  not  be  understood  until  traced  back  to 
the  policy  respecting  the  ultimate  payment  of  debts  with 
which  each  form  of  contract  stands  in  harmony.  A  bond 
re-imbursable  from  the  date  of  its  issue  shows  great  careless- 
ness on  the  part  of  the  administration  as  to  ultimate  pay- 
ment ;  on  the  other  hand,  a  bond  guaranteed  against  imme- 
diate payment  is  evidence  of  an  intention  to  escape  the  evils 
of  perpetual  indebtedness.  This  is  not  difficult  to  under- 
stand when  it  is  noticed  that  money  lenders  desire  some  per- 
manency in  investments,^  and  if  the  government  will  not 
guarantee  this  in  the  contract  they  will  themselves,  secure  it 
by  refusing  to  pay  full  value  for  the  bonds.  They  know 
well  that  a  government  which  sells  its  obligations  at  eighty 
cents  on  the  dollar  will  not  be  likely  to  make  quick  payment 
at  par ;  and,  reasoning  from  this  fact,  if  the  government  in- 
sists upon  the  right  of  re-imburseraent  at  pleasure,  they  de- 
mand a  bond  bearing  a  nominal  interest  so  low  that  it  may 
be  placed  upon  the  market  at  discount.  It  is  sometimes  said 
that  Mr.  Hamilton  believed  in  a  perpetual  debt,  and  when 
one  notices  the  form  into  which  he  threw  the  obligations  of 
the  United  States,  the  only  escape  from  this  conclusion  is 

*  In  1793,  agents  of  the  United  States  in  Amsterdam,  charged  with  con- 
tracting a  public  loan,  wrote  as  follows :  "  In  vain  did  we  strive  to  stipulate 
a  right  for  the  United  States  to  re-imburse  the  principal  or  part  of  it  at  their 
pleasure.  The  condition  was  positively  and  absolutely  objected  to."  In  this 
case  the  bonds  did  not  have  a  fluctuating  price. 


162  NATIONAL  DEFICIT  FINANCIERING. 

to  say  that  lie  was  ignorant  of  the  true  meaning  of  the  con- 
tracts which  he  created.  On  the  other  hand,  it  is  known  that 
Mr.  Gallatin  held  strenuously  to  the  policy  of  debt  payment, 
and  with  his  administration,  as  we  have  seen,  debt  paper  be- 
gan to  be  fashioned  after  a  new  model. 

With  the  law  of  February  25,  1862,  a  new  clause  was 
introduced  into  the  contracts  of  public  debts.  It  was  stipu- 
lated that  the  bonds  created  upon  the  authority  of  this  act 
should  be  "  redeemable  at  the  pleasure  of  the  United  States 
after  five  years,  and  payable  twenty  years  from  the  date  "  of 
their  issue.  It  seems  appropriate  to  give  the  name  of  lim- 
ited-option debts  to  contracts  of  this  sort,  for  there  is  a  lim- 
ited period  dmnng  which  payment  of  the  principal  is  at  the 
option  of  the  government.  France  has  made  some  slight 
use  of  this  form  of  contract,  but  for  the  most  part  its  em- 
ployment is  confined  to  the  United  States.  It  is  known  in 
Europe  as  the  American  system. 

But  it  is  difficult  to  see  what  peculiar  advantage  is  found 
in  limited-option  debts.  The  clause  which  permits  the  cred- 
itor to  demand  payment  at  a  specified  time  is  no  guarantee 
against  the  establishment  of  a  perpetual  debt,  for  one  legis- 
lature can  not  bind  a  subsequent  legislature  to  continue  a 
policy  of  debt  payment  that  it  may  have  begun.  A  law  may 
provide  that  a  specific  debt  shall  be  taken  up  at  a  specified 
time,  but  since  provision  for  this  may  be  made  by  the  sale 
of  new  securities,  such  a  provision  can  not  be  effective  for 
extinguishing  indebtedness.  It  may  be  said  that  such  a 
clause  in  the  law  is  educative  in  its  tendencies,  but,  when 
one  considers  how  common  are  long-time  contracts  in  the 
course  of  ordinary  business,  and  how  familiar  is  the  practice 
of  paying  one  debt  with  the  proceeds  of  another,  this  argu- 
ment must  be  regarded  as  a  little  fanciful. 

But  not  only  is  this  clause,  introduced  into  the  contracts 
of  indebtedness  of  the  United  States  by  Mr.  Chase,  useless, 
it  may  prove  the  occasion  of  embarrassment  to  the  adminis- 
tration. Suppose  the  country  to  be  in  the  midst  of  a  trying 
war  when  the  debt  falls  due,  what  effect  will  maturing  obli- 


CLASSIFICATION  OF  PUBLIC  DEBTS.  163 

gations  be  likely  to  exert  upon  public  credit  ?  Will  not  tlie 
necessity  of  placing  redemption  bonds,  in  addition  to  bonds 
sold  for  making  headway  against  extraordinary  expenditure, 
tend  to  complicate  treasury  affairs  and  dej)ress  public  credit  ? 
The  expense  of  the  operation  also  is  against  it,  and  this  may 
easily  be  avoided  by  making  the  bonds  payable  at  the  pleas- 
ure of  the  government.  The  United  States  has  thus  far 
escaped  any  embarrassment  from  the  free  use  made  of  lim- 
ited-option bonds,  but  this  is  due  rather  to  her  good  fortune 
than  to  the  foresight  of  her  financiers.  A  good  financier 
will  always  make  the  best  possible  provision  for  the  worst 
possible  contingencies;  and  this  he  can  not  do  unless  he 
keeps  a  debt  well  under  the  control  of  the  government. 

It  remains  yet  to  consider  debts  payable  by  installments. 
The  act  of  November  10,  1808,  upon  the  authority  of  which 
stock  was  issued  for  the  purchase  of  Louisiana,  provides  an 
illustration  of  such  a  debt.  In  this  case,  there  was  no  option 
whatever  granted  the  government,  the  principal  being  made 
payable  in  four  equal  annual  installments.  When  some  special 
and  limited  demand  for  money  arises  in  the  course  of  peace 
administration,  especially  if  it  be  of  the  nature  of  an  invest- 
ment of  funds,  there  is  no  objection  to  contracts  of  this  sort. 
The  supposed  advantages  arising  from  them  is,  that  treasury 
operations  are  thus  kept  distinct,  and  impress  themselves  upon 
the  administration  as  separate  and  independent  transactions. 
It  is  thus  observed  that  debts  payable  by  installments  spring 
from  a  desire  to  establish  good  budgetary  management,  but 
that  nothing  can  be  said  in  their  favor  as  a  means  of  carry- 
ing on  the  fiscal  operation  of  a  great  war.  Indeed,  their 
very  conception  is  out  of  harmony  with  an  extended  system 
of  financiering,  while  the  arguments  that  lie  against  them  are 
the  same  as  those  above  urged  against  limited-option  debts. 

But  there  is  another  method  of  applying  this  idea  that 
may  not  be  so  easily  passed  over.  It  sometimes  occurs  that 
the  contract  which  creates  a  debt  creates  also  the  means  of 
its  extinction,  by  demanding  an  annual  payment  more  than 
sufficient  to  cover  the  interest.     Thus  it  is  quite  common  for 


164  NATIONAL  DEFICIT  FINANCIERING. 

Egyptian  obligations  to  demand  that  the  principal  shall  be 
redeemed  in  a  stated  number  of  years  (fifteen  being  the 
usual  time)  by  an  accumulating  sinking-fund.  The  expunge- 
ment of  the  debt  begins  immediately  upon  the  sale  of  the 
bonds.  So  far  as  the  debtor  is  concerned,  there  is  but  one 
defense  for  such  a  contract.  On  condition  that  the  proceeds 
of  the  loan  have  been  invested  in  some  productive  enter- 
prise, which  immediately  brings  a  revenue  into  the  public 
treasury,  it  is  but  the  application  of  sound  commercial  rules  to 
throw  the  burden  of  the  debt  upon  the  earnings  of  the  indus- 
tiy,  and  to  extinguish  the  claims  against  it  as  quickly  as  possi- 
ble. But  if  the  investment  must  lie  some  time  before  bearing 
revenue,  as  in  case  of  a  railroad  or  a  canal,  or  if  the  money 
be  borrowed  for  unproductive  purposes,  it  is  contrary  to  any 
principles  upon  which  loans  may  be  defended  that  payment 
should  begin  as  soon  as  the  contract  is  signed.  Loans  are 
for  the  convenience  of  the  public  treasury,  and,  unless  made 
payable  at  the  pleasure  of  the  government,  may  become  the 
source  of  unnecessary  embarrassment.  This  policy  also 
leads  to  the  absurdity  of  paying  debt  while  the  treasury  is 
under  the  necessity  of  borrowing  fresh  capital,  which,  to  say 
the  least,  is  an  expensive  amusement.  The  criticism  upon 
such  contracts  as  we  are  here  considering  is  that  they  join 
two  things  that  should  be  kept  entirely  distinct,  namely: 
debt  creation  and  debt  extinction. 

Why,  then,  it  may  be  asked,  have  Enghsh  money-lenders 
chosen  to  throw  the  Egyptian  debt  into  this  form?  The 
answer  is  simple.  Although  unfavorable  to  debtors,  it  is  of 
advantage  to  creditors  when  lending  to  weak  and  unstable 
states.  The  carelessness  evinced  by  creditors  as  to  the  length 
of  time  that  bonds  may  run  springs  from  the  fact  that  a 
state  is  conceived  as  a  personage  of  perpetual  life ;  yet  in 
case  of  countries  like  Egypt,  capitalists  do  not  like  to  calcu- 
late upon  too  distant  a  future.  It  has  been  already  shown  ^ 
that  the  value  of  Egyptian  bonds  depends  in  large  measure 

'  Part  I,  chapter  ii. 


CLASSIFICATION  OF  PUBLIC  DEBTS.  165 

upon  the  foreign  policy  of  England,  and,  in  the  presence  of 
Continental  complications,  this  is  a  thing  that  men  do  not 
feel  that  they  can  safely  forecast.  It,  seems,  then,  that  con- 
tracts of  this  sort  may  be  accepted  as  evidence  either  of 
weakness  on  the  part  of  the  debtor  or  of  distrust  on  the  part 
of  the  creditor. 

Again,  a  government  may  enter  into  a  contract  by  which 
it  is  prohibited  from  paying  its  obligations  more  rapidly  than 
at  a  fixed  annual  rate.  In  this  case  payment  by  installments 
can  not  be  demanded  by  the  creditor,  but  redemption  in  any 
other  manner  is  forbidden  the  debtor.  The  most  interesting 
example  of  such  obligations  for  American  readers  is  that  of 
stock  authorized  in  1790  for  the  redemption  of  the  Revolu- 
tionary debt.  This  stock  is  described  in  the  law  as  "  bearing 
an  interest  of  six  per  cent  per  annum,  payable  quarter-yearly, 
and  subject  to  redemption  by  payments  not  exceeding  in 
one  year,  on  account  of  both  principal  and  interest,  the  pro- 
portion of  eight  dollars  upon  each  hundred."  The  govern- 
ment could  begin  this  payment  at  pleasure,  suspend  it  at  will, 
or  pay  less  than  two  dollars  annually  toward  the  extinction  of 
the  debt;  but  there  remained  no  way  of  hastening  payment 
except  by  purchase  upon  the  market.  The  object  of  this 
provision  was  to  guarantee  creditors  in  the  enjoyment  of  that 
rate  of  interest  which  ruled  at  the  time  the  contract  was 
drawn ;  ^  its  practical  result  was  to  establish  a  twenty-four- 
year  annuity  of  $8  for  every  $100  originally  borrowed. 

In  our  previous  study  of  annuities  it  was  discovered  that 
long-time  annuities  did  not  meet  the  requirements  of  good 
financiering,  because  they  unnecessarily  embarrassed  the 
policy  of  debt  payment.  The  same  objection  attaches  to 
this  plan  of  Mr.  Hamilton.  The  record  of  subsequent  treas- 
ury operations  renders  it  reasonably  certain  that  a  simple  six- 
per-cent  bond,  guaranteed  to  run  for  twenty  years,  would 

*  This  was  one  of  the  main  inducements  offered  by  Mr.  Hamilton  to  obtain 
subscribers  to  his  loan.     In  his  famous  report  on  public  credit,  it  was  assumed 
that  "  the  rate  of  interest  of  money  in  the  United  States  will,  in  five  years,  fall 
to  five  per  cent,  and  in  twenty  to  four." 
12 


IQQ  NATIONAL  DEFICIT  FINANCIERING. 

have  proved  satisfactory  to  public  creditors,  and  have  in- 
duced them  to  comply  with  the  other  conditions  which  the 
government  imposed.  This  would  have  brought  the  larger 
part  of  the  six-per-cent  bonds  under  the  control  of  Congress 
in  the  years  1811  and  1813/  and  permitted  either  their  re- 
demption or  their  conversion  into  stock  bearing  a  reduced 
rate  of  interest.  But  since  the  right  of  redemption,  except 
at  a  stated  rate,  had  been  signed  away,  it  was  found  neces- 
sary to  continue  the  higher  rate  of  interest  upon  the  com- 
mon stock  till  1818,  and  upon  the  "deferred  stock  "until 
1824.^  As  the  matter  turned  out,  the  war  of  1812  would 
have  rendered  such  an  operation  upon  the  common  stock  im- 
possible, had  it  been  permitted  by  the  contract;  but  this 
does  not  excuse  the  Federalists  for  having  adopted  a  bad 
theory  of  funding. 

It  has  been  further  urged  against  payment  by  install- 
ments that  they  encourage  a  spirit  of  careless  expenditure 
among  the  people — a  result  due  to  the  small  amounts  in  which 
the  payments  come.  Referring  again  to  the  debt  already 
considered,  it  was  provided  by  the  act  of  1796  that  the 
six-per-cent  stock  should  be  redeemed  by  dividends  of  If 
per  cent  in  March,  June,  and  September,  and  of  3f  per  cent 
in  December.  Upon  a  thousand-dollar  bond  this  would 
amount  to  three  payments  of  $15  and  one  payment  of  $35 
each  year,  one  quarter  of  which  should  be  accredited  to  the 
repayment  of  the  principal.  But,  since  it  is  difficult  to 
find  investments  for  small  amounts,  it  is  quite  likely  that 
the  entire  sum  would  be  spent  in  current  expenses,  and, 
at  the  end  of  the  twenty-two  years  required  for  extinguish- 
ing the  debt,  the  creditor  would  find  his  principal  to  have 
been  consumed.  Such  is  the  argument,  but  I  can  not  fully 
appreciate  the  importance  that  is  attached  to  it.    It  appears 

»  Of  this  stock  there  was  issued  $30,088,897,  of  which  $14,1'?'7,450  was 
issued  in  1791,  and  $12,112,586  in  1793.  More  than  half  of  the  remainder  waa 
issued  in  1794. 

*  This  was  a  six-per-cent  stock,  upon  which  payment  of  any  interest  was  de- 
ferred until  1800.     Its  amount  was  one  third  of  the  common  six-per-cents. 


CLASSIFICATION  OF  PUBLIC  DEBTS.  167 

to  me  to  confound  personal  saving  with  the  building  of  a 
national  capital.  But,  without  considering  the  economic 
doctrine  upon  which  the  argument  rests,  it  is  pertinent  to 
notice  that  investers  do  not  seem  to  recognize  the  advantages 
of  repayments  in  large  sums.  By  a  law  of  February  11, 1807, 
a  refunding  scheme  was  set  on  foot  which  tested  the  point 
at  issue.  The  law  authorized  an  exchange  of  the  eight-per- 
cent annuity  bonds  for  six-per-cent  ordinary  bonds  payable 
at  the  pleasure  of  the  government.  The  main  inducement 
upon  which  Mr.  Gallatin  relied  to  secure  the  acceptance  of 
his  proposal  was  the  fact  that  creditors  when  paid  would  be 
paid  in  sums  large  enougb  for  re-investments.  Out  of  $31,- 
800,000  of  stock  to  which  this  law  applied,  $8,154,000  only 
were  sent  in  for  exchange  into  the  new  stock,  thus  showing 
that  the  public  did  not  appreciate  the  Secretary's  offer.  It 
may  be  doubted  if  the  thought  of  what  men  will  do  with 
their  money  after  the  government  has  paid  it  to  tbem  should 
materiaiUy  influence  a  financial  policy. 

lY.  Shall  loans  he  placed  at  or  helow  par? 

We  have  learned  from  the  foregoing  study  how  necessary- 
it  is  for  the  element  of  time  in  a  debt  contract  to  be  fixed 
by  the  public  authorities ;  and  we  now  proceed  to  consider 
whether  it  is  of  greater  relative  importance  for  the  govern- 
ment to  determine  the  principal  of  the  debt  or  the  rate  of 
interest.  There  is  another,  and  perhaps  a  more  suggestive, 
statement  of  the  question,  namely :  Shall  loans  be  placed  at 
or  below  par  ? 

We  must  divest  our  minds  at  the  outset  of  the  common 
error  that  it  is  possible  for  a  government  to  decide  upon  all 
the  conditions  under  which  bonds  are  issued.  Not  only 
is  this  impossible,  but  to  endeavor  to  do  so  is  evidence  of 
obstinacy  and  ignorance  rather  than  of  a  strong  financial 
policy  for  which  it  is  so  frequently  taken.  It  is  a  just  criti- 
cism upon  the  administration  of  Mr.  Chase  that  he  did  not 
adequately  recognize  his  dependence  upon  ordinary  business 
motives.  In  March,  1861,  a  call  was  made  for  the  remnant 
of  a  loan  that  was  authorized  the  February  previous,  and, 


108  NATIONAL  DEFICIT  FINANCIERING. 

althougli  tlie  government  was  in  pressing  need  of  money, 
Mr.  Chase  refused  all  bids  below  ninety-four  cents.  This, 
says  Dr.  von  Hock,  an  Austrian  writer  of  international 
reputation,  was  the  first  of  those  errors  committed  by  the 
Secretary.^  A  further  illustration  of  the  false  ideas  enter- 
tained by  Mr.  Chase,  as  the  representative  of  a  state  borrow- 
ing money,  is  presented  in  connection  with  the  banking  loans 
of  1862.  These  were  two  loans  of  $50,000,000  each,  which 
certain  bankers  undertook  to  place  for  the  government. 
They  were  regarded  as  quite  advantageous  to  the  govern- 
ment, but  there  exists  some  difference  of  opinion  as  to  the 
motives  employed  by  the  Secretary  to  induce  the  banks  to 
accede  to  his  terms.  His  biographer  and  eulogist  praises  his 
firmness  in  defending  the  interests  of  the  public  throughout 
this  transaction.  On  the  other  hand,  the  Austrian  writer 
above  referred  to  says  the  banks  were  "  half  persuaded  and 
half  coerced  "  to  accept  the  terms  offered.  The  general  im- 
pression is  that  Mr.  Chase  threatened  to  return  to  "Washing- 
ton and  issue  treasury  notes  unless  the  banks  furnished  him 
in  gold  with  what  he  wanted.  Such  a  suggestion  would  not 
for  a  moment  have  been  entertained  by  an  able  financier.  A 
threat  under  such  circumstances  shows  weakness,  and  any 
temporary  gain  would  be  more  than  balanced  by  entailing 
loss  of  credit.  A  strong  financial  policy  contemplates  more 
than  temporary  emergencies,  and  guards  public  credit  with 
such  jealous  care  that  lenders  will  freely  accede  to  terms 
advantageous  to  the  government.  It  recognizes  that,  in  bor- 
rowing money,  the  state,  like  a  private  corporation,  is  sub- 
ject to  the  ordinary  rules  of  the  market. 

Another  thought  is  suggested  in  this  connection.  If  sub- 
scribers to  loans  be  permitted  to  bid  for  bonds,  it  must  occur 
that  the  financier  wiU  receive  a  great  variety  of  offers.  The 
question  then  arises  whether  the  government  should  grant 
to  every  subscriber  the  same  terms  as  those  secured  by  the 
most  favored,  or  whether  each  proposal  should  be  taken  on 

'  "  Die  Finanzen  und  Finanzgeschichte  der  Vereiuigten  Staatcn  von  Amerika," 
von  Dr.  Carl  Freiherrn  von  Hock,  p.  441. 


CLASSIFICATION  OF  PUBLIC  DEBTS.  IQQ 

its  own  merits  ?  Mr.  Gallatin  was  never  willing  to  make 
discriminations  between  subscribers  of  the  same  class.  If, 
for  example,  be  fomid  it  necessary  to  borrow  $2,000,000 
and  received  bids  varying  from  par  to  7  per  cent  discount,  the 
entire  loan  would  be  placed  at  93  cents.  One  who  appreci- 
ates Mr.  Gallatin's  character,  and  knows  how  delicate  was 
his  sense  of  common  fau-ness,  can  well  understand  why  he 
adopted  this  method  in  the  placement  of  bonds;  but  for 
most  people  this  appears  a  refinement  of  justice  to  which 
business  methods  do  not  usually  conform.  And,  indeed, 
when  it  is  recognized  that  lenders  are  variously  situated  with 
regard  to  disposable  capital,  that  money  does  not  always  bear 
the  same  value  to  every  man,  and  that  one  subscriber  may 
stand  in  greater  need  of  public  stock  than  another,  it  is  by 
no  means  certain  that  perfect  fairness  between  purchasers  is 
secured  by  this  method.  The  only  financial  defense  for 
advertising  to  equalize  bids,  lies  in  the  suggestion  that  the 
amount  which  a  government  must  pay  for  its  capital  will  be 
less  when  treating  its  creditors  in  a  body  than  when  accept- 
ing or  rejecting  each  offer  by  itself.  Each  subscriber  is 
promised  the  most  favorable  terms  that  must  be  granted  to 
any  subscriber  whose  capital  is  necessary  to  fill  the  loan. 
There  is,  therefore,  an  inducement  offered  for  men  to  bid  a 
high  price,  calculating  somewhat  upon  securing  the  stock  at 
a  lower  figure.  They  bid  high  because  they  wish  to  be 
among  those  who  secure  the  stock.  On  the  other  hand,  if  it 
were  known  that  every  subscription  remained  as  first  made, 
the  lenders  would  calculate  upon  the  lowest  price  that  might 
be  offered  and  still  be  included  in  the  loan.  This  question 
must  be  decided  u]3on  a  general  knowledge  of  the  motives 
that  actuate  business  men,  for,  so  far  as  I  am  aware,  there  has 
been  no  attempt  to  place  a  loan  under  the  stipulations  here 
considered  which  tests  its  merits  in  a  satisfactory  manner. 
The  general  practice  of  peoples  has  been  against  it. 

Returning,  then,  to  the  original  question :  Do  sound  rules 
of  finance  demand  that  the  principal  of  the  debt  or  the  rate 
of  interest  should  be  determined  by  the  government?     As 


170  NATIONAL   DEFICIT  FINANCIERING. 

a  matter  ot  fact,  public  financiers  Lave  quite  uniformlj  re- 
garded the  rate  jof  interest  as  of  more  relative  importance. 
This  was  the  case  with  Mr.  Pitt,  who  may  be  said  to  have  in- 
vented discount  financiering.  Mr.  Chase  also  inclined  to  this 
opinion,  as  may  be  learned  from  the  following  quotation 
from  his  second  report : 

The  Secretary  forbears  making  any  recommendations  con- 
cerning the  authorities  with  which  it  may  be  expedient  to  in- 
vest hira  in  respect  to  future  loans.  He  begs  leave  to  refer 
this  matter  to  the  better  judgment  of  Congress,  suggesting 
only  that,  whatever  discretion  it  may  be  thought  prudent  to 
give  in  other  respects,  the  rate  of  interest  be  limited  by  law. 

This  manifest  leaning  toward  low  rates  of  interest  is  in 
large  measure  political  rather  than  financial,  and  springs 
from  the  instinct  of  self-preservation  on  the  part  of  an  ad- 
ministration. The  public  feels  a  certain  satisfaction  in 
knowing  that  its  government  pays  3  per  cent  rather  than 
6  per  cent  upon  money  borrowed.  It  may  be  that  the  prin- 
cipal in  the  former  case  is  twice  as  large  as  in  the  latter,  so 
that  the  burden  of  the  debt  is  the  same,  but  all  people  do 
not  analyze  with  care  what  party  orators  may  be  pleased  to 
tell  them.  Familiarity  with  commercial  transactions  has 
left  the  general  impression  that  a  low  rate  of  interest  is  evi- 
dence of  financial  strength,  and  the  government  desires  to 
derive  what  assistance  it  can  from  this  sentiment. 

One  can  not,  however,  think  this  the  chief  reason  why 
financiers  estimate  a  low  rate  of  interest  of  such  importance 
that  they  are  willing  to  suffer  heavy  discount  on  the  bonds 
sold  in  order  to  secure  it.  The  claim  upon  which  they  rest 
their  decision  is,  that,  for  a  specified  sum  appropriated  to  the 
support  of  loans,  a  larger  amount  of  actual  cash  may  be  cov- 
ered into  the  treasury  by  means  of  discount  bonds  bearing  a 
low  rate  of  interest,  than  by  means  of  bonds  sold  at  par  bear- 
ing a  nominally  higher  rate.  For  purpose  of  illustration,  let 
it  be  assumed  that  the  condition  of  the  money  market  is  such 
that  a  five-per-cent  bond  will  float  at  par;  by  arithmetic 
computation,  a  four-per-cent  bond  ought  to  sell  for  80,  and  a 


CLASSIFICATION  OF  PUBLIC  DEBTS.  171 

tihree-per-cent  for  60.  But  the  fact  is  that  the  actual  bids 
for  bonds  never  conform  to  their  relative  arithmetic  values. 
If  a  five-per-cent  sells  for  100,  a  four-per-cent  of  the  same 
sort  will  sell  for  more  than  80,  and  a  three-per-cent  at  a 
figure  that  is  yet  relatively  higher.  There  can  be  no  ques- 
tion as  to  the  truth  of  this  statement,  as  may  be  learned  from 
the  quotations  of  public  stock  in  any  country  that  has  devel- 
oped commercial  ideas.  The  loans  issued  by  France,  for 
example,  on  account  of  the  Russian  war  in  1854,  were  put 
out  at  two  rates  of  interest.  It  was  found  that  the  three-per- 
cent rentes  sold  for  65,  showing  that  capital  was  secured  for 
an  actual  rate  of  '0462  ;  the  other  bonds,  paying  4|^  per  cent, 
sold  for  92,  which  called  for  an  actual  interest  payment  of 
•0489.  In  July,  1806,  quotations  of  American  stock  were  as 
follows  :  three-per-cents,  64 ;  common  six-per-cents,  98 ;  navy 
sixes,  100  ;  eight-per-cents,  from  105  to  106.  Comparing  the 
three-per-cents  with  the  eight-per-cents,  there  is  found  to  be 
an  actual  difference  in  the  true  interest  paid  of  more  than  2^ 
per  cent.  This,  however,  is  excessive,  and  due  to  particular 
and  not  general  causes.  A  comparison  of  the  three-per-cent 
with  the  six-per-cent  stock  shows  much  more  accurately  the 
proper  relation  between  the  two  sorts  of  bonds.  It  must, 
therefore,  be  recognized  that  a  government  covers  more  cash 
into  its  treasury  for  a  given  interest  payment  when  it  offers 
bonds  for  sale  that  may  be  purchased  at  discount  than  when 
the  nominal  interest  is  so  high  that  obligations  will  float  at 
par ;  and,  since  it  is  usual  to  borrow  money  only  in  the  pres- 
ence of  some  urgent  necessity,  this  saving  in  the  interest  ac- 
count, by  which  current  expenses  are  somewhat  lessened,  is 
regarded  as  a  matter  of  much  moment. 

It  seems,  then,  upon  the  face  of  the  matter,  that  financiers 
have  suflScient  ground  for  their  choice ;  but,  before  this  may 
be  finally  conceded,  we  must  learn  why  those  who  lend 
money  are  willing  to  pay  relatively  higher  prices  for  bonds  at 
discount  than  for  bonds  at  par.  One  step  in  this  explanation 
was  suggested  in  our  previous  discussion  respecting  the  time 
for  which  bonds  should  be  guaranteed  against  redemption. 


172  NATIONAL  DEFICIT  FINANCIERING. 

Investors  always  prefer  bonds  of  long  life,  and  they  know 
tliat  a  government  will  not  so  readily  press  a  policy  of  debt 
payment  when  public  obligations  stand  below  par  as  when 
they  are  quoted  at  par  or  at  premium.  This  is  one  reason 
why  discount  bonds  bear  a  relatively  higher  price.  But,  in 
addition  to  this,  such  bonds  secure  to  the  investor  two 
sources  of  profit,  whereas  a  bond  sold  at  par  grants  but  one. 
They  both  pay  annuities  as  long  as  they  exist,  but  discount 
bonds  alone  offer  a  premium  to  him  who  furnishes  the  gov- 
ernment with  capital.  This  premium  makes  its  appearance 
when  paper  purchased  at  discount  is  redeemed  at  par;  or, 
for  the  original  investor,  it  is  secured  when  sale  of  obliga- 
tions is  effected  at  a  figure  higher  than  the  original  jDrice. 
In  this  is  discovered  the  essential  advantage  to  investors  of 
discount  bonds. 

This  subject  will  appear  in  a  clearer  light  if  we  consider 
certain  other  methods  of  granting  special  privileges  to  induce 
men  to  place  their  capital  at  the  disposal  of  the  state.  Pre- 
vious to  1780  most  loans  were  placed  at  or  near  par,  and  the 
rate  of  interest  paid  was  not  excessive — at  least,  so  it  ap- 
peared upon  the  face  of  the  returns.  But  a  closer  analysis 
shows  that  then,  as  now,  financiers  were  disinclined  to  adver- 
tise the  rates  of  interest  they  were  obliged  to  pay.  It  was 
the  prevalent  custom  to  distribute  premiums  and  prizes  to 
those  who  would  lend  money  to  the  government  at  such 
terms  as  it  dictated.  Sometimes  a  definite  amount  of  extra 
stock  was  issued  in  proportion  to  the  amount  of  common 
stock  purchased.  For  example,  $15  of  premium  stock,  or 
an  annuity  terminable  at  a  specified  time,  would  be  given  to 
every  person  who  purchased  $100  of  stock  at  par.  Some- 
times these  premiums  were  distributed  in  large  sums  by  lot- 
tery drawings.  In  such  a  case  the  government  availed  itself 
of  the  spirit  of  gambling,  and  the  hope  of  winning  a  prize 
through  a  venture  that  could  not  entail  total  loss  of  invest- 
ment, enabled  the  government  to  secure  money  upon  more 
advantageous  terms  than  by  a  simple  distribution  of  premium 
stock.     Another  variation  of  this  bounty  system  resulted  in 


CLASSIFICATION  OF  PUBLIC  DEBTS.  173 

a  combination  of  a  public  loan  and  a  life  lottery,  or,  more 
respectfully  designated,  took  the  form  of  tontine  loans.  A  ton- 
tine loan  is  one  in  which  the  government  holds  out  the  hope 
of  excessive  returns  by  application  of  the  principle  of  survivor- 
ship. Suppose  that  a  hundred  persons  of  nearly  equal  age 
subscribe  to  a  loan  in  the  form  of  a  life  annuity,  but  that  the 
government  is  not  freed  from  any  payment  arising  out  of 
the  loan  until  the  decease  of  the  last  survivor — such  an  op- 
eration would  constitute  a  tontine.  The  prize  in  this  case  is 
secured  only  to  those  who  are  so  fortunate  as  to  survive  the 
other  members  of  the  class.  Such  persons  receive  the  inter- 
est upon  the  total  sum  subscribed  by  the  class,  which  insures 
to  the  last  survivor  a  large  return  on  the  basis  of  a  small  in- 
vestment. There  occurred  in  France  not  long  ago  the  death 
of  a  woman  at  the  age  of  ninety-six,  who  had  subscribed  six 
hundred  livres  in  two  tontines ;  and,  being  the  last  survivor 
in  each  class,  she  received  during  the  latter  years  of  her  life 
an  annual  payment  of  T6,000  livres.  One  may  rest  assured 
that  her  friends  procured  for  her  the  best  possible  medical 
attendance. 

Is  it  not,  then,  proper  to  say  that  the  idea  of  granting 
special  inducements  to  money  lenders,  in  addition  to  those 
clearly  stated  in  the  debt  contract,  may  claim  whatever  re- 
spectability arises  from  age  and  long  practice  ?  And  is  not 
one  warranted  in  concluding  that  the  full  extent  of  Mr.  Pitt's 
originality,  when  he  began  to  sell  bonds  at  discount,  was  in 
discovering  a  new  method  of  applying  an  old  custom  ? 
Granting  the  necessity  of  seducing  money  lenders,  and  of 
deceiving  the  public  by  befogging  treasury  accounts,  there 
can  be  no  question  but  that  the  practice  instituted  by  Mr. 
Pitt  is  in  every  way  superior  to  the  granting  of  lottery  prizes 
or  life-chances.  Without  undertaking  a  discussion  of  ton- 
tine loans,  it  may  be  remarked  that  they  have  always  proved 
to  be  unnecessarily  expensive,  and  have  for  that  reason  been 
quite  generally  abandoned.  The  rule  of  life-chances  em- 
ployed in  insurance,  and  upon  which  a  system  of  life  annuities 
might  be  successfully  based,  does  not  apply  when  joined  to 


174:  NATIONAL  DEFICIT  FINANCIERING. 

the  principle  of  granting  a  benefit  to  survivors,  for  in  this 
latter  case  the  government  is  obliged  to  calculate  its  pay- 
ments upon  the  expectation  of  the  life  of  a  class,  instead  of 
individuals.  The  government  can  not,  therefore,  balance 
the  falling  in  of  annuities  by  failure  to  attain  the  average 
age  against  the  unusual  payments  to  those  whose  lives  exceed 
the  common  expectation.  The  lives  of  all  persons  in  the 
class  must  be  reckoned  as  the  life  of  the  person  who  lives  the 
longest.  An  exhaustive  study  of  tontines  would  show  that 
the  principle  upon  which  they  are  based  is  altogether  false, 
whether  applied  to  the  insurance  of  life  or  to  public  loans. 
There  is  no  fairness,  no  morality,  and,  in  consequence,  no 
public  economy  in  the  manner  in  which  they  distribute  their 
benefits. 

Nor  can  the  system  of  awarding  lottery  prizes,  whether 
of  stock  or  money  or  lands,  meet  with  the  approval  of 
finance.  Without  referring  to  the  spirit  of  gambling  fos- 
tered by  it,  this  system  is  one  that  quickly  exhausts  all  its 
resources,  and  is  likely  to  fail  the  state  when  most  the  state 
needs  assistance.  Under  certain  conditions,  and  at  compara- 
tively long  intervals  of  time,  a  government  may  receive 
assistance  from  lottery  loans;  but,  if  public  necessities  are 
of  such  a  nature  as  to  call  for  continuous  appeal  to  the  money- 
market,  it  will  be  found  that  public  credit  must,  in  the  long 
run,  suffer  from  any  departm-e  from  simple  commercial 
methods. 

The  issue  of  premium  stock  is  not  open  to  such  severe 
censure  as  the  use  of  tontines  and  lottery  prizes,  for  it  is  at 
least  possible  to  reduce  the  motives  upon  which  such  a  trans- 
action rests  to  reliable  rules ;  and,  if  the  premium  stock  is 
of  the  same  sort  as  the  ordinary  stock,  there  is  no  essential 
difference  between  this  practice  and  the  issue  of  discount 
bonds.  But  if,  as  was  customary,  the  stock  issued  for  pay- 
ment of  premiums  is  drawn  as  a  terminable  annuity,  or  in 
the  form  of  bonds  which  become  operative  at  some  specified 
time,  or  payable  under  special  stipulations,  our  preference 
must  be  given  to  discount  financiering.     The  use  of  such 


CLASSIFICATION  OF  PUBLIC  DEBTS.  175 

premiums  not  only  complicates  treasury  accounts,  but  it  in- 
curs tlie  danger  of  throwing  burdens  on  the  treasury  at  a 
time  when  they  might  occasion  great  inconvenience.  This 
may  be  obviated  by  the  use  of  discount  bonds,  and  the  gov- 
ernment may  at  the  same  time  reap  whatever  advantage 
comes  with  premiums.  In  this  case  the  premium  consists  of 
a  promise  to  purchase  at  par  what  was  originally  sold  at  dis- 
count, but,  if  the  payment  of  the  debt  is  at  the  pleasure  of 
the  government,  so  also  is  that  of  the  premium  ;  the  pur- 
chase, therefore,  need  never  be  made.  During  the  great 
Napoleonic  wars,  there  were  received  into  the  English  treas- 
ury on  account  of  loans  the  sum  of  £498,700,000,  for  which 
there  were  created  bonds  to  the  amount  of  £773,700,000 ; 
that  is  to  say,  bounties  to  the  extent  of  £275,000,000  of 
fictitious  stock  were  granted  to  those  who  loaned  money  to 
the  government.  But  England  has  never  paid  these  boun- 
ties, for  she  has  never  paid  her  debt.  Still  the  lender  has 
no  ground  of  complaint,  for  the  government  has  in  every 
particular  met  its  contract,  and  he  has  received  the  benefit  of 
discount  purchases  through  the  gradual  rise  in  the  price  of 
public  stocks. 

It  must,  then,  be  admitted  that,  if  special  inducements 
are  to  be  granted  to  purchasers  of  public  obligations,  in  ad- 
dition to  those  clearly  expressed  in  the  simple  form  of  a 
debt  contract,  the  most  feasible  method  of  attaining  this 
end  is  through  the  sale  of  discount  bonds.  But  the  question 
yet  remains,  whether  the  benefits  secured  are  equivalent  to 
the  evils  entailed. 

One  strong  argument  against  discount  bonds  is,  that  they 
lend  their  influence  to  the  establishment  of  a  perpetual  debt. 
The  simple  fact  that  the  stock  created  is  nominally  greater 
than  the  capital  originally  received,  and  that  the  nominal 
interest  paid  is  lower  than  that  secured  upon  capital  engaged 
in  business,  renders  people  disinclined  to  tax  themselves  for 
the  expungement  of  a  debt.  There  is  an  economic  error  in 
this  reasoning,  as  will  be  shown  when  our  attention  shall  be 
drawn  to  the  topic  of  debt  payment ;  but,  erroneous  though 


176  NATIONAL  DEFICIT  FINANCIERING. 

it  be,  when  taken  in  connection  with  the  disinclination  of 
strong  governments  to  repudiate  their  obligations,  it  is  suffi- 
cient to  induce  people  to  transmit  to  the  future  all  burdens 
received  from  the  past.  "  This  is  the  princiiDal  cause,"  sajs 
M.  Leroy-Beaulieu,  "  for  the  duration  of  public  debts  in  Eu- 
rope." Mr.  Gallatin  also  regarded  discount  bonds  as  a  bar- 
rier against  payment.  In  his  report  of  1806  he  asked  for 
authority  to  make  certain  changes  in  the  three-per-cent  stock, 
"  which,  he  said,  in  its  present  shape,  may  be  regarded  as 
irredeemable."  This  stock  was  then  quoted  at  64.  It  is 
true  that  the  United  States  has  twice  paid  off  a  debt  con- 
tracted below  par,  and  is  expunging  the  principal  of  a  third, 
established  by  a  reckless  course  of  financiering,  but  the 
experience  of  this  nation  is  by  no  means  final  against  the 
claim  that  discount  sales  tend  to  establish  perpetual  burdens. 
The  payment  of  public  debt  in  this  country  is  in  part  charge- 
able to  the  industrial  vigor  and  expanding  wealth  of  its  in- 
habitants, but  more  especially  to  the  fact  that  her  people 
believe  a  protective  tariff  to  be  the  source  of  private  wealth. 
It  would  not  be  safe  for  the  American  people  to  continue 
their  experiments  with  discount  bonds,  relying  upon  bound- 
less resources  and  erroneous  economic  doctrines  again  to  pull 
them  through. 

But  it  may  be  objected  that  this  argument  against  dis- 
count bonds  is  only  pertinent  upon  the  assumption  that  the 
principal  of  debts  should  be  paid.  This  is  true,  but  it  is  not, 
therefore,  necessary  to  accept  the  converse  of  the  statement, 
that  discount  bonds  are  defensible  for  a  government  that  has 
deliberately  adopted  the  policy  of  perpetual  obligations. 
Assuming  even  that  debts  are  not  to  be  paid,  discount  bonds 
are  yet  contrary  to  sound  rules  of  finance,  for  they  do  not 
permit  a  government,  by  taking  advantage  of  a  fall  in  the 
rate  of  interest,  to  lighten  the  annual  payment  on  account 
of  a  debt.  "What  was  said  against  the  use  of  annuities  ap- 
plies in  large  degree  to  discount  bonds.  Suppose,  for  exam- 
ple, that  a  five-per-cent  bond  would  float  at  par,  but  that  the 
government  chooses  to  place  a  three-per-cent  at  discount; 


CLASSIFICATION  OF  PUBLIC  DEBTS.  I77 

in  this  manner  it  may  effect  an  immediate  saving,  estimated 
on  the  capital  actually  received,  of  one  half  of  one  per  cent. 
That  is  to  say,  by  selling  a  three-per-cent  bond  at  66f  rather 
than  a  five-per-cent  bond  at  par,  it  pays  but  4^  per  cent  in- 
terest upon  the  money  covered  into  the  treasury.  Holding, 
then,  in  mind  that  the  actual  rate  of  interest  is  4:^  per  cent, 
although  the  nominal  rate  is  3  per  cent,  is  it  not  plain  that 
the  government  can  not  avail  itself  of  a  fall  in  the  market 
value  of  money  to  change  the  condition  of  the  contract  until 
the  market  rate  for  money  falls  below  3  per  cent  ?  The  gov- 
ernment might  be  able  to  secure  all  the  money  it  wanted 
at  4  per  cent,  but  it  must  continue  to  pay  the  higher  actual 
rate  of  interest  notwithstanding.  Had  the  bonds,  on  the 
other  hand,  been  charged  with  5  per  cent  and  sold  at  par, 
any  fall  in  market  quotations,  however  slight,  would  have 
permitted  the  government  to  borrow  fresh  money,  at  less 
expense,  with  which  to  extinguish  the  old  debt.  There  re- 
mains, then,  a  conclusive  argument  against  discount  bonds, 
even  though  the  policy  of  perpetual  debts  has  been  adopted. 
This  argument  is,  that  the  immediate  saving  in  interest,  se- 
cured by  the  use  of  discount  bonds,  is  more  than  balanced 
by  the  ultimate  loss  resulting  from  the  unnecessarily  high 
rates  of  interest  which  must  be  continued,  although  the 
credit  of  the  government  would  permit  fresh  money  to  be 
borrowed  at  lower  rates.  It  is  a  safe  rule  for  the  financier 
to  hold  public  bonds  closely  to  par. 

The  conclusions  arrived  at  from  the  foregoing  analysis 
may  be  shortly  stated  as  follows : 

Patriotic  loans,  while  they  may  be  sometimes  used,  can 
not  form  a  permanent  part  of  a  revenue  system  ;  forced  loans 
are  to  be  deprecated  under  all  circumstances ;  voluntary 
loans  appeal  to  the  only  reliable  motive  upon  which  to  rest 
a  credit  policy. 

With  regard  to  technical  questions  in  the  placement  of 
a  debt,  it  was  learned  that  floating  debts  should  be  but  spar- 
ingly used ;  that  credit  is  strengthened  by  a  guarded  variety 
of  debt-paper ;  that  bonds  are  preferable  to  annuities ;  that 


178  NATIONAL  DEFICIT  FINANCIERING. 

government  should  insist  in  determining  all  questions  per- 
taining to  time  of  payment,  but  that  its  decisions  in  this 
matter  should  conform  to  the  peculiar  conditions  of  each 
case ;  and  that  loans  should  be  placed  at  par  rather  than  dis- 
count. 


CHAPTEE  III. 

LIQUIDATION    OF   WAR   ACCOUNTS. 

We  shall  consider  in  the  present  chapter  the  management 
of  a  public  treasury  at  the  close  of  a  severe  and  protracted 
war.  It  is  not  at  all  strained  to  introduce  this  question  in  a 
study  upon  public  debts.  As  modern  wars  are  carried  on, 
the  labor  of  large  numbers  of  men  is  necessarily  diverted 
from  ordinary  pursuits,  capital  is  recklessly  destroyed,  and 
many  economic  forces  are  introduced  wholly  at  variance  with 
the  customary  industrial  relations.  It  is  desirable,  for  many 
reasons,  that  the  old  industrial  conditions  should  be  speedily 
re-established,  and,  as  it  was  in  large  measure  through  the 
operations  of  the  treasury  department  that  the  country  was 
thrown  off  its  peace  footing,  so  a  proper  employment  of  the 
fiscal  machinery  may  assist  in  restoring  the  old  conditions. 

The  first  step  toward  the  restoration  of  peace  relations 
consists  in  the  funding  of  floating  obligations.  It  is  no  occa- 
sion for  surprise  that  public  accounts  should  become  involved 
during  the  continuance  of  a  protracted  war.  "Where  thou- 
sands of  men,  subject  to  the  accidents  and  exigencies  of  war, 
are  dependent  for  support  upon  a  single  agency,  there  can 
not  be  perfect  control  in  matters  of  purchase  and  supply. 
An  army  is  frequently  obliged  to  live  off  the  country 
through  which  it  is  passing,  and  to  make  impressments  of  all 
sorts  that  its  onward  course  may  not  be  checked.  Under 
such  conditions  the  commander  takes  whatever  is  needed, 
and  issues  certificates  of  indebtedness  for  the  goods  taken. 
Transactions  of  the  commissary,  also,  are  sure  to  give  rise  to 


180  NATIONAL  DEFICIT  FINANCIERING.      * 

forms  of  obligations  tliat  leave  the  public  accounts  at  the 
close  of  hostilities  in  a  confused  condition.  This  was  the 
case  at  the  close  of  the  late  rebellion.  In  March,  1865,  there 
were  outstanding  $171,700,000  of  certificates  of  indebtedness 
and  $114,200,000  of  suspended  and  unpaid  requisitions.^ 
Such  accounts  as  these  should  receive  the  immediate  atten- 
tion of  the  financier,  because  they  weigh  heavily  upon  the 
credit  of  the  government.  If  existing  in  the  form  of  un- 
audited and  unsettled  claims,  they  are  not  regarded  as  good 
commercial  paper,  for  they  do  not  carry  upon  their  face  evi- 
dence of  their  own  genuineness.  They  are,  consequently, 
unavailable  assets  to  those  who  hold  them.  They  can  not  be 
sold  except  at  discount,  nor  can  they  be  Used  as  security  in 
the  borrowing  of  money — in  short,  they  partake  of  the  char- 
acter of  unaccepted  bills.  Thus,  the  fact  that  some  of  the 
obligations  of  the  government  are  not  settled  and  funded 
obstructs  their  use,  narrows  their  market,  and,  in  consequence, 
depresses  their  price  below  their  natural  or  arithmetic  value. 
This  can  not  fail  to  influence  the  price  of  all  government 
securities. 

For  another  reason,  also,  will  an  unadjusted  debt  become 
the  subject  of  uncertainty  and  distrust.  Those  in  possession 
of  such  obligations  at  the  close  of  a  war  are  likely  to  be 
"feeble  holders  " — that  is  to  say,  men  whose  necessities  force 
them  to  sell  their  debt  for  what  it  will  bring.  Speculation 
will  spring  up  about  this  class  of  securities,  and  not  only  will 
injustice  be  done  the  original  holder,  but  the  credit  of  the 
government  will  necessarily  suffer.  The  history  of  the  float- 
ing obligations  created  by  the  Eevolutionary  War  is  a  warn- 
ing to  all  financiers  of  the  danger  that  lurks  in  any  neglect 
of  this  sort  of  debts. 

A  stronger  reason,  however,  is  presented  in  the  fact  that 
a  floating  and  uncertain  debt  is  a  hindrance  to  the  re-estab- 
lishment of  peace  industries.     In  order  to  introduce  again 

'  Bearing  six  per  cent  interest,  payable  one  year  from  date,  or  earlier,  at  the 
option  of  the  government,  issued  in  satisfaction  of  audited  and  settled  accounts. 
—Law  of  March  1,  1862. 


LIQUIDATION"  OF  WAR  ACCOUNTS.  181 

into  society  that  diversity  of  industries  which  marks  a  healthy 
business  adjustment,  the  task  of  undertakership  must  be  easy 
and  sure.  This  task  consists  in  bringing  men  and  material 
together  for  productive  work.  In  a  highly  organized  com- 
mercial society,  the  ease  with  which  this  may  be  done  de- 
pends upon  the  availability  of  assets.  If  men  can  quickly 
realize  upon  whatever  property  they  possess,  every  business 
opening  in  which  there  is  a  reasonable  hope  of  profit  will 
find  some  one  who  is  willing  to  risk  its  undertaking ;  and 
this  is  the  reason  why,  from  the  standpoint  of  industrial 
re-adjustment,  it  becomes  the  first  duty  of  the  financier  to 
rescue  all  public  obligations  from  doubt  and  uncertainty, 
since  by  so  doing  they  are  rendered  available  for  business 
purposes.  In  this  respect  there  is  nothing  to  be  criticised 
in  the  financial  management  of  the  United  States  treasury 
directly  after  the  close  of  the  late  war.  The  army  was 
promptly  paid,  and  outstanding  obligations  were  thrown  into 
available  form,  and  in  this  manner  the  government  provided, 
so  far  as  it  lay  in  its  power,  for  labor  to  come  into  contact 
with  capital. 

It  further  lies  within  the  duty  of  the  financier  to  sim- 
plify and  unify  the  funded  debt  and  to  ask  from  the  legisla- 
ture a  clear  interpretation  of  any  questionable  phrases  in  the 
laws  that  define  the  duties  of  the  treasurer  or  the  right  of 
creditors.  In  general  the  reasons  for  this  are  the  same  as 
have  been  already  presented  in  favor  of  the  liquidation  of 
uncertain  obligations.  But  there  is  an  additional  reason  why 
clearness  and  certainty  should  attach  to  funded  obligations. 
It  may  be  that,  at  the  close  of  war,  the  country  finds  itself 
in  a  condition  to  employ  with  profit  foreign  capital,  and  that 
this  capital  may  be  the  most  easily  procured  by  an  exporta- 
tion of  national  obligations.  In  such  a  case,  it  is  desirable 
that  the  price  paid  for  this  debt  should  be  as  high  as  pos- 
sible, for  the  higher  the  price  the  larger  wiU  be  the  amount 
of  capital  returned,  and  the  less  will  be  the  premium  neces- 
sary to  pay  out  when  the  debt  is  again  brought  home. 
Upon  the  world's  market  the  power  of  absorption  is  so  great 
13 


182  NATIONAL  DEFICIT  FINANCIERING. 

that  the  amount  of  bonds  offered  for  sale  is  not  the  most 
potent  element  in  determining  their  value.  Provided  only 
the  people  who  sell  their  promises  are  believed  to  be  willing 
and  able  to  meet  their  obligations,  the  price  which  their 
bonds  may  command  vnll  approximate  the  capitalization  of 
the  interest  calculated  upon  at  the  ruling  rate  for  money 
upon  the  market  where  the  bonds  are  sold.  It  must,  there- 
fore, be  regarded  as  wise  statesmanship  to  declare  a  simple, 
a  strong,  and  an  honest  policy,  and  to  so  interpret  the  con- 
tract that  no  doubt  may  exist  respecting  it,  for  then  only 
can  a  people  realize  the  full  value  of  their  debt  upon  expor- 
tation. 

There  is  another  question  pertaining  to  the  management 
of  floating  obligations  far  more  difiicult  of  solution  than 
those  just  passed  in  review.  It  is  more  than  probable,  in 
the  present  state  of  financial  sentiment,  that  an  exhaustive 
war  will  occasion  an  issue  of  irredeemable  paper  money,  and 
the  question  that  now  presents  itself  inquires  respecting  the 
true  policy  of  a  government,  if,  at  the  close  of  hostilities,  it 
find  itself  in  the  presence  of  an  inflated  circulating  medium. 

It  may  be  fau'ly  assumed  that  the  people  intend  some- 
time to  resume  payments  in  specie — at  least,  our  present  dis- 
cussion need  not  be  encumbered  with  a  supposition  to  the 
contrary.  Should  one  refuse  to  admit  this  assumption,  it  is 
suggested  that  he  interrupt  for  a  time  his  study  of  public 
debts,  and  leain  the  lesson  taught  by  history  respecting  the 
evils  that  invariably  follow  all  attempts  to  employ  local  cur- 
rency. Admitting,  then,  the  necessity  of  resumption,  the 
pertinent  question  for  the  financier  is,  whether  this  shall  be 
undertaken  immediately  upon  a  return  of  peace,  or  whether 
it  shall  be  postponed  until  financial  reconstruction  in  other 
directions  shall  have  been  perfected. 

There  are  several  reasons  why  resumption  of  specie  pay- 
ments should  claim  early  attention.  Thus,  as  worthy  of  first 
notice,  a  government  can  not  expect  to  enjoy  high  credit  so 
long  as  there  is  any  doubt  respecting  the  kind  of  money  that 
may  be  employed  in  the  discharge  of  its  contracts.     It  is  not 


LIQUIDATION  OF  WAR  ACCOUNTS.  183 

enough  to  declare  that  bonds  are  payable  in  specie,  for,  so 
long  as  a  depreciated  currency  remains  the  familiar  medium 
of  exchange  within  a  country,  jealousy  of  the  public  cred- 
itor will  be  a  constant  menace  to  the  fulfillment  of  such  a 
promise.  Familiarity  with  irredeemable  paper  is  a  standing 
invitation  to  partial  repudiation,  and,  without  considering 
the  justice  or  morality  of  such  a  measure,  it  is  sufficient  to 
say  that,  in  the  long  run,  any  scaling  of  debts  is  a  very  ex- 
pensive measure  of  lightening  taxation.  High  credit  is  an 
essential  condition  to  an  early  conversion  of  the  debt,  and  a 
self-regulating  currency,  based  upon  the  kind  of  money  used 
by  the  important  commercial  peoples  of  the  world,  is  essen- 
tial to  high  credit.  From  this  it  appears  that  the  economy 
of  national  resources  demands  the  quickest  possible  return  to 
a  specie  basis.^ 

Again,  recognizing  a  return  to  specie  payments  as  an 
ultimate  necessity,  there  will  probably  be  less  resistance  to 
such  a  measure  immediately  after  the  close  of  hostilities 
than  at  any  subsequent  period.  The  sentiment  of  a  coun- 
try is  then,  on  all  questions  of  reconstruction,  in  a  somewhat 
plastic  condition,  and  may  be  formulated  with  comparative 
ease  in  favor  of  radical  financial  measures.  It  is  of  course 
possible  that  a  people  may  recede  from  a  policy  of  resump- 
tion upon  which  they  have  actually  entered,  but  one  can  not 
on  this  account  conclude  that  the  endeavor  has  been  fruit- 
less. Even  though  for  a  time  the  policy  be  set  aside,  it  leaves 
within  the  country  a  party  whose  political  reputation  is 
bound  up  with  the  ultimate  success  of  the  measure,  and  the 
natural  desire  in  all  men  to  prove  that  they  were  ia  the  right 
when  in  the  minority  will  keep  the  question  before  the  pub- 
lic. And  more  than  this  is  true.  When  it  comes  finally  to 
be  recognized  that  healthy  industries  can  not  be  maintained 
upon  the  basis  of  an  inflated  currency,  and  the  country  be- 
gins to  feel  the  enervating  effects  of  a  too  free  use  of  indus- 

'  This   subject  is  more  fully  considered   in  the   following  chapter  which 
treats  of  the  policy  of  conversion. 


184:  NATIONAL  DEFICIT  FINANCIERING. 

trial  stimulant,  there  lies  in  tlie  immediate  history  of  the  past 
a  rejected  policy  about  which  a  truer  sentiment  may  easily 
crystallize.  For  this  reason  it  seems  wise  that  a  jpost- 
helium  financial  policy  should  embrace  a  plan  for  an  imme- 
diate return  to  a  sound  money  basis. 

The  most  important  argument,  however,  in  support  of 
the  policy  here  proposed,  rests  upon  the  well-known  work- 
ings of  an  irredeemable  paper  currency.  There  is  no  law  of 
fiscal  science  more  firmly  established  than  this  :  that  an  ex- 
cess of  circulating  medium  depreciates  the  value  of  the  pur- 
chasing unit  and  leads  to  unsteadiness  of  general  prices.  It 
is  equally  well  recognized  that  unsteadiness  of  prices  invites 
speculation,  retards  the  establishment  and  extension  of 
healthy  business,  and,  if  long  continued,  must  surely  lead  to 
the  throes  of  a  commercial  panic.  Against  such  a  calamity 
the  financier  should  oppose  the  full  influence  of  the  treasury 
department.  He  should  do  all  in  his  power  to  restore  those 
conditions  in  which  trustworthy  calculations  are  possible,  for 
in  this  manner  it  may  be  he  rescues  the  country  from  the 
evils  of  a  commercial  revulsion. 

It  was  this  argument  which  induced  Secretary  McCul- 
loch  to  advocate  in  his  first  report  the  policy  of  contraction 
and  resumption.  For  illustration  of  the  evil  workings  of 
superabundant  paper,  he  did  not  search  the  history  of  for- 
eign peoples  nor  the  financial  record  of  his  own  country  for 
more  than  thirty  years ;  yet  the  facts  which  he  recited  are 
adequate  for  the  complete  vindication  of  the  plan  which  he 
submitted  to  Congress.  It  would  be  well  worth  the  time  of 
one  who  desires  to  fully  understand  this  subject  to  read 
with  care  the  financial  report  of  1865.  The  Secretary  there 
traces  the  inflation  of  banking  paper  and  discounts  which 
preceded  the  commercial  crises  of  1837  and  185Y,  and  com- 
pares the  greater  inflation  of  1865  with  the  condition  of 
affairs  thus  disclosed.  Like  causes,  he  argues,  will  naturally 
produce  like  results. 

Upon  the  last  of  October,  1865,  the  circulating  medium 
of  the  country  was  substantially  as  follows : 


LIQUIDATION  OF  WAR  ACCOUNTS.  185 

1.  United  States  notes  and  fractional  currency $454,218,038.20 

2.  Notes  of  the  National  banks 185,000,000.00 

3.  Notes  of  the  banks,  including  outstanding  issues 

of  State  banks  converted  into  National  banks . .       65,000,000.00 

$704,218,038.20 

In  addition  to  tlie  United  States  notes,  there  were  also 
outstanding  §32,536,900  five-per-cent  treasury  notes,  and 
$173,012,1'10  compound-interest  notes,  of  whicli  it  was  esti- 
mated that  $30,000,000  were  in  circulation  as  currency.  It 
thus  appears  that  the  paper  money  of  the  country  amounted 
to  8734,218,000  without  including  any  of  the  7.30  notes, 
some  of  which  were  in  common  circulation.  As  contrasted 
with  this,  the  bank  notes  in  circulation  in  January,  1860, 
were  put  at  $207,324,000.  "  J^othing  beyond  this  state- 
ment," concludes  the  Secretary,  "  is  required  to  exhibit  the 
present  inflation  or  to  explain  the  causes  of  the  cuiTent  and 
advancing  prices.  If  disaster  followed  the  expansion  of 
1837  and  1857,  what  must  be  the  consequences  of  the  pres- 
ent expansion  unless  speedily  checked  and  reduced."  ^ 

The  argument  presented  by  Mr.  McCulloch  in  favor  of 
an  immediate  return  to  specie  payments  is  neither  brilliant 
nor  new,  but  it  possesses  the  rare  merit  of  being  true.  The 
root  of  all  opposition  to  the  policy  which  he  so  strenuously 
urged  is  found  in  the  fear  that  the  change  from  a  paper  to 


'  The  banking  circulation  for  selected  years  previous  to  the  war,  as  also  the 
deposits  and  loans  of  the  banks,  are  given  in  the  following  table.  The  signifi- 
cance of  these  figures  consists  in  the  marked  expansion  of  credits  that  preceded 
the  commercial  disasters  of  1837  and  1857. 


TEAR. 

Notes. 

Deposits. 

Loans. 

January,  1830 

$61,324,000 
103,692,495 
140,301,038 
149,185,890 
58,564,000 
195,747,950 
214,778,822 
155,208,,344 
207,102,000 

$55,560,000 
83,081,000 
115,104,000 
127,397,000 
56,168,000 
212,706,000 
230,351,000 
185,932,000 
253,802,000 

$200,451,000 

"    1835.  

"    1836 

365,163,000 
457,506,000 

"    1837 

525,115,000 

"    1843 

254,544,000 

"    1856 

634,183,000 

"    1857 

684,456,000 

"    1858 

583,165,000 

"    I860 

691,945,000 

186  NATIONAL  DEFICIT  FINANCIERING. 

a  specie  basis  will  discourage  business  enterprises.  The  first 
step  toward  the  use  of  superior  money  is  to  get  rid  of  so 
mucli  of  the  inferior  money  that  the  two  together  will  not 
constitute  redundant  currency ;  but  such  a  step  must  entail 
a  sacrifice  of  part  of  the  price  of  all  commodities  affected  by 
the  excessive  issues.  Thus  the  policy  of  contraction  means 
a  falling  market,  and  this  brings  with  it  a  state  of  affairs  in 
which  long  contracts  are  dangerous,  and  jobbers  are  in  con- 
sequence afraid  to  carry  large  stocks  of  goods,  or  manufact- 
urers to  work  to  the  full  capacity  of  their  machinery.  Under 
such  conditions  business  imagination  is  dampened,  or,  to 
state  the  matter  in  common  language,  contraction  brings  dull 
times.  For  such  as,  on  account  of  the  evils  here  set  forth, 
urge  the  permanent  maintenance  of  "  domestic  currency," 
the  following  argument  can  have  no  pertinency,  since  the 
only  point  now  conceived  to  lie  in  question  has  to  do  with 
the  proper  time  for  setting  on  foot  a  policy  recognized  as 
ultimately  necessary.  On  this  question  there  is  room  for 
honest  and  reasonable  difference  of  opinion.  Those  who 
oppose  the  claim  that  a  resumption  of  specie  payments  should 
engage  the  first  attention  of  the  government  after  cessation 
of  hostilities,  do  so  because  they  conceive  that  a  people  must 
be  in  an  exhausted  condition  at  the  close  of  a  war;  and,  feel- 
ing that  a  restitution  of  industries  to  a  peace  demand  is  of 
prime  necessity,  they  wish  to  postpone  the  burden  of  con- 
tracting the  currency  to  a  more  convenient  season.  The  plan 
recommended  by  them  would  be  to  first  reconstruct  industrial 
society  upon  the  basis  of  an  inflated  currency,  to  recall  labor 
discharged  from  the  direct  service  of  the  state  to  its  accus- 
tomed channel  of  activity,  and  then  to  administer  the  medi- 
cine of  contraction  which  a  radically  pernicious  system  of 
financiering  during  the  war  has  rendered  necessary. 

This  position  assumed  by  the  opponents  to  quick  resump- 
tion may  be  met  in  two  ways.  It  may  be  urged  that  the  evils 
attending  a  process  of  contraction  are  of  slight  importance ; 
but  to  adopt  such  language  is  to  confess  one's  ignorance  of  the 
confusion  and  discouragement  that  arise  from  rapidly  fall- 


LIQUIDATION  OF  WAR  ACCOUNTS.  187 

ing  prices.  As  Mr.  Mill  truly  says :  "  It  [money]  only  exerts 
a  distinct  and  independent  influence  of  its  own  when  it  gets 
out  of  order,"  but  when  out  of  order  its  workings  are  in  the 
highest  degree  pernicious.  The  more  rational  reply  to  those 
who  would  postpone  all  measures  looking  toward  resumption 
is,  that  postponement  aggravates  the  evils  of  which  complaint 
is  made,  while  immediate  curtailment  in  the  amount  of  mon- 
ey will  shield  the  country  from  the  full  effect  of  an  inflated 
currency.  If  this  claim  can  be  made  good,  there  remains  no 
room  tor  doubt  as  to  the  expediency  of  quick  resumption. 

An  analysis  of  tbe  claim  here  presented  leads  to  a  con- 
sideration of  general  prices  from  three  points  of  view  :  We 
must,  in  the  first  place,  look  at  the  influence  of  a  return  of 
peace  upon  general  prices,  and  through  prices  upon  the  spirit 
of  venture  indulged  by  business  men  ;  we  must,  in  the  sec- 
ond place,  notice  the  different  results  that  follow  the  various 
ways  in  which  a  redundant  paper  currency  may  be  used ; 
and,  lastly,  we  must  discover  the  order  in  which  the  several 
classes  of  commodities  are  affected  by  the  process  of  infla- 
tion. It  is  only  upon  the  basis  of  facts  disclosed  by  such  a 
study  that  we  may  reasonably  determine  the  time  at  which 
a  policy  of  contraction  will  entail  the  least  sacrifice  upon  a 
country.  Let  us,  then,  consider  these  questions  in  the  order 
in  which  they  have  been  suggested. 

Firstly. — The  immediate  commercial  effect  of  a  return 
of  peace,  after  a  contracted  war,  is  toward  an  advance  of 
general  prices.  This  will  follow  irrespective  of  the  sort  of 
money  the  country  is  using.  It  finds  its  source  in  the  feeling 
of  hope  that  permeates  society  on  account  of  changed  com- 
mercial conditions.  But  this  tendency  can  not  be  regarded  as 
permanent ;  indeed,  from  its  very  nature,  it  is  not  able  long 
to  endure.  It  is  known  that  a  return  of  peace  will  reopen 
the  channels  of  normal  demand,  and  it  is  believed  that  they 
who  first  present  themselves  to  the  consuming  public  with 
an  adequate  supply  will  reap  large  reward.  Since,  however, 
every  producer  is  secretly  entertaining  this  intention,  industri- 
al society  becomes  abnormally  active.     An  increased  demand 


188  NATIONAL  DEFICIT  FINANCIERING. 

for  raw  material  is  tlius  created,  wliich  tends  to  raise  its  price ; 
labor,  also,  may  be  in  some  sliglit  degree  affected,  and  in  gen- 
eral the  phenomena  of  a  rising  market  make  their  appearance. 
l!Tow,  it  must  be  recognized  that  this  state  of  afiairs  rests 
upon  hopes  which  can  not  be  fully  realized.^  It  springs  in 
part  from  an  exaggerated  estimation  of  the  extent  of  a  peace 
demand  in  time  of  peace  as  compared  with  peace  demand  in 
time  of  war,  and  in  part  from  the  determination  of  each  pro- 
ducer to  come  first  into  the  market  with  goods  for  sale.  But 
such  miscalculations  and  such  competition  lead  directly  to 
commercial  disaster.  The  government  can  do  much  to  allay 
this  spirit  of  unwarranted  speculation  by  announcing  its  de- 
termination to  proceed  at  once,  and  in  the  most  direct  man- 
ner, to  the  re-in statement  of  specie  currency.  There  will 
undoubtedly  be  protests  from  the  public.  The  cry  against 
such  a  policy  will  be  raised  by  those  who  expect  to  reap  per- 
sonal advantage  from  rapid  fluctuations  in  general  values,  as 
also  by  those  who,  not  discerning  the  true  cause  of  threatened 
evils,  hope  to  avoid  all  commercial  embarrassment  by  main- 
taining currency  at  its  inflated  amount.  The  purpose  of  the 
former  class  is  dishonest ;  that  of  the  latter  class  is  impossible 
of  realization.  The  true  policy  is  to  reduce  the  volume  of 
money  in  circulation,  for  contraction  firmly  established  and 
actually  entered  upon  would  do  much  to  clear  the  imagina- 


'  "  There  are  no  indications  of  real  and  permanent  prosperity  in  our  large 
importations  of  foreign  fabrics;  in  the  heavy  operations  at  our  commercial 
marts ;  in  the  splendid  fortunes  reported  to  be  made  by  skillful  manipulations 
at  the  gold-room  or  the  stock  board ;  no  evidences  of  increasing  wealth  in  the 
facts  that  railroads  and  steamboats  are  crowded  with  passengers,  and  hotels  with 
guests ;  that  cities  are  full  to  overflowing,  and  rents  and  the  prices  of  the  neces- 
saries of  life,  as  well  as  luxuries,  are  daily  advancing.  All  these  things  prove 
rather  that  a  foreign  debt  is  being  created,  that  the  number  of  non-producers  is 
increasing,  and  that  productive  industry  is  being  diminished.  There  is  no  fact 
more  manifest  than  that  the  plethora  of  paper  money  is  not  only  undermining 
the  morals  of  the  people  by  encouraging  waste  and  extravagance,  but  is  striking 
at  the  root  of  our  material  prosperity  by  diminishing  labor.  Tlie  evil  is  not  at 
present  beyond  the  control  of  legislation,  but  it  is  daily  increasing,  and,  if  not 
speedily  checked,  will  at  no  distant  day  culminate  in  widespread  disaster." — "  Re- 
port of  Secretary  McCulloch  for  1865,"  p.  9. 


LIQUIDATION  OF  WAR  ACCOUNTS.  1S9 

tioES  of  business  men,  and  to  prevent  the  evil  consequences 
which  would  follow  the  restoration  of  peace  industries  upon 
a  plane  of  prices  abnormaUj  high.  This  benefit  is,  of  course, 
not  comparable  with  the  sacrifices  of  extended  contraction, 
but  the  argument  assumes  that  contraction  is  inevitable,  and 
recommends  that  it  be  undertaken  when  incidental  benefits 
may  attend  the  measure. 

Secondly. — But  it  must  also  be  noticed  that  failure  to 
reduce  the  volume  of  money  in  circulation  at  the  close  of 
a  war  that  has  been  carried  on  by  means  of  legal-tender  notes 
amounts,  for  all  practical  purposes,  to  a  still  further  expansion 
of  the  currency.  This  arises  from  the  changed  use  to  which 
the  currency  is  put,  and  relies  for  an  explanation  upon  the 
fact  that  general  prices  are  more  sensitive  to  fluctuation  in 
the  volume  of  money  wdien  the  exchanges  affected  by  it  are 
numerous  rather  than  large.  Such  a  change,  in  a  country 
whose  mihtary  policy  is  like  that  of  the  United  States, 
always  attends  a  return  of  peace,  because  cessation  of  hostili- 
ties permits  an  immediate  reduction  of  both  army  and  navy 
expenditures.  For  example,  in  the  case  of  the  late  war, 
within  four  days  after  the  surrender  of  General  Lee,  all  en- 
listments and  all  inirehases  for  the  array  were  discontinued. 
On  the  Ist  of  April,  1865,  there  were  a  million  men  in  the 
field  under  pay  from  the  government ;  at  the  end  of  October, 
eight  hundred  thousand  had  been  discharged  from  the  public 
service,  and  by  1866  the  standing  army  had  been  reduced  to 
fifty  thousand  men.  By  this  means  the  public  expenditure 
for  the  support  of  the  army  had  been  reduced  from  $516,- 
200,000  to  833,800,000.  Curtailment  in  the  navy  was  nearly 
as  rapid.  During  the  last  two  years  of  the  war  the  govern- 
ment had  consumed  nearly  twenty-seven  per  cent  of  the 
total  product  of  the  nation,  and  the  treasury  notes  which  it 
issued  were  in  large  measure  used  in  purchases  on  a  grand 
scale.  Upon  the  disbanding  of  the  army,  however,  this  un- 
usual employment  of  notes  passed  away,  while  the  return  of 
peace  demand,  calhng  for  a  re-adjustment  of  industrial  energy, 
drew  the  greater  part  of  existing  money  into  the  ordinary 


190  NATIONAL  DEnCIT  FINANCIERING. 

channels  of  trade.  In  this  manner  the  prices  of  many  com- 
modities, wliich  bad  been  before  affected  as  it  were  by  sympa- 
thy, felt  for  the  first  time  tbe  direct  and  full  influence  of  a 
redundant  currency. 

Tbe  reasoning  wbicb  leads  to  tbis  conclusion  rests  upon 
tbe  fact  tbat  a  larger  proportion  of  tbe  redundant  currency 
is  forced  into  retail  trade  in  time  of  peace  tban  in  time  of 
war.  "  Tbe  principle  of  limitation,"  says  Mr.  Tooke,  "  to 
tbe  maintenance  of  an  advanced  price  of  any  particular  arti- 
cle, .  .  .  is  not  the  quantity  of  money  in  existence  in  the 
country,  hut  the  quantity  of  money  in  the  hands  or  jpockets  of 
consmners  destined  for  exjpenditure  in  that  articled  ^  Tbis  is 
pertinent  to  tbe  point  in  band  wben  placed  by  tbe  side  of  tbe 
following  distinction  submitted  upon  tbe  authority  of  Adam 
Smith  :  "  Tbe  circulation  of  every  country  may  be  considered 
as  divided  into  two  different  branches — tbe  circulation  of  the 
dealers  with  one  another  and  tbe  circulation  between  tbe 
dealers  and  tbe  consumers.  .  .  .  Tbe  value  of  tbe  goods  cir- 
culated between  tbe  different  dealers  with  one  another  never 
can  exceed  the  value  of  those  circulated  between  tbe  dealers 
and  tbe  consumers,  whatever  is  bought  by  the  dealers  being 
ultimately  destined  to  be  sold  to  tbe  consumers.  .  .  .  [But] 
paper  money  may  be  so  regulated  as  either  to  confine  itself 
very  much  to  the  circulation  between  the  different  dealers, 
or  to  extend  itself  likewise  to  a  great  part  of  that  between 
the  dealers  and  the  consumers."  " 

For  the  question  we  are  now  considering,  tbe  point  to  be 
decided  is,  whether  tbe  extension  of  the  wholesale  trade  at- 
tendant upon  a  return  of  peace  will  absorb  the  fund  of  treas- 
ury notes  formerly  used  by  the  commissary  department  in 
making  its  purchases.  Under  the  established  system  of 
credit  transactions,  it  is  doubtful  if  tbis  will  be  the  case ;  for 
transactions  between  dealers  are  usually  carried  on  by  means 
of  the  mechanism  of  banking,  wbicb,  being  in  reality  a  sys- 
tem of  refined  barter,  is  cheaper  than  the  cheapest  money. 

'  "  An  Inquiry  into  the  Currency  Principle,"  by  Thomas  Tooke,  Esq.,  p.  74. 
«  "Wealth  of  Nations,"  McCulloch's  edition,  pp.  141,  142. 


LIQUIDATION  OF  WAR  ACCOUNTS.  191 

The  wholesale  trade,  therefore,  although  the  volume  of  its 
exchanges  may  increase  far  beyond  the  cessation  of  purchases 
on  the  part  of  the  government,  can  not  absorb  the  money 
thus  set  free.  It  must  flow  into  the  channels  of  retail  trade, 
and  be  used  in  purchases  between  consumers  and  small  deal- 
ers— that  is  to  say,  if  not  withdrawn  from  circulation  it  must 
be  used  in  such  a  manner  that  the  country  will  suffer  to  the 
utmost  the  pernicious  effects  of  a  redundant  cuiTcncy. 

Thirdly. — There  is  another  reason  why  a  quick  return  to 
a  specie  basis  after  the  close  of  a  war  may  shield  the  country 
from  the  full  consequences  of  an  erroneous  course  of  finan- 
ciering. Many  who  write  upon  the  influence  of  an  expand- 
ing currency  make  the  mistake  of  supposing  that  the  vol- 
ume of  money  forms  a  level  like  that  of  the  sea,  and  that 
commodities,  like  ships  floating  upon  its  surface,  rise  and  fall 
with  its  ebb  and  flow  ;  but  the  truth  is  that  no  such  constant 
ratio  can  be  maintained  in  the  list  of  general  prices  disturbed 
by  fluctuations  in  the  currency.  Those  commodities  whose 
prices  are  the  most  easily  affected  are  such  as  maybe  quickly 
produced  and  quickly  consumed.  The  demand  for  them  is 
constantly  recurring,  and  for  this  reason  they  come  fre- 
quently into  contact  with  the  circulating  medium  through 
actual  sales.  On  the  other  hand,  goods  that  last  for  some 
time,  or  that  consumers  may  easily  avoid  by  foregoing  their 
use,  or  which  are  not  subject  to  frequent  sales,  do  not  so 
readily  reflect  variations  in  the  amount  of  money  by  changes 
in  their  price.  We  are  then  prepared  to  learn  that  land 
used  for  agricultural  purposes  is  the  last  commodity  to  be 
influenced  by  a  redundant  currency.  Even  house  rents  and 
city  real  estate,  which  respond  quickly  enough  to  speculative 
exciteinent,  move  but  sluggishly  under  the  stimulus  of  inflation. 

This  being  the  case,  it  must  certainly  be  to  the  interest 
of  the  country  at  large  to  arrest  the  natural  workings  of  in- 
flation before  it  has  exerted  its  full  influence  upon  landed 
property.  It  was  especially  appropriate  that  the  United 
States  should  hold  this  in  view  in  1865,  since  a  large  propor- 
tion of  the  men  who  were  discharged  from  the  army  turned 


192  NATIONAL  DEFICIT  FINANCIERING. 

their  attention  to  agricultural  industry/  and  it  was  througli 
their  purchases  that  the  redundant  currency  found  its  way 
into  the  values  of  farming  lands.  It  is  not  claimed  that 
any  measures  which  the  government  might  have  taken  could 
have  wholly  avoided  this  result,  for  the  money  was  in  the 
hands  of  those  who  wished  to  buy  land,  and  could  not  be 
gotten  from  them  in  any  other  way  than  to  give  them  land 
for  it.  Bu?  it  is  claimed  that  the  tendency  toward  spec- 
ulation in  land,  following  this  fictitious  and  temporary 
rise  of  values,  which  led  to  the  mortgaging  of  farms  to  secure 
more  money  with  which  to  buy  more  land,  or  to  the  purchase 
of  so  much  land  that  the  stock  and  machinery  for  working  it 
must  be  bought  by  the  proceeds  of  a  mortgage,  might  have 
been  checked  by  a  vigorous  and  decided  policy  on  the  part 
of  the  government.  This  would  have  obviated  much  of  the 
suffering  that  attended  contraction.  In  the  manufacturing 
industry,  capital  is  so  quickly  turned  that  the  producer  can 
frequently  throw  part  of  the  loss  of  falling  prices  on  the 
consumer,  or  on  the  party  from  whom  he  buys  his  raw  ma- 

'  "  The  diversion  from  the  industries  of  the  Northern  States,  consequent 
upon  the  war,  is  variously  estimated  at  from  500,000  to  750,000  men.  It  is  not 
to  be  understood  that  these  figures  represent  an  absolute  loss  to  the  industry  of 
the  country,  although  such  loss,  from  casualties  and  diseases  incident  to  war, 
was  undoubtedly  very  considerable ;  but  the  universal  testimony  of  manufact- 
urers is,  that  the  operatives  who  entered  the  army  from  their  establishments 
have  not,  as  a  general  thing,  returned  to  their  old  employments.  In  two  in- 
stances where  a  somewhat  careful  examination  was  made  by  the  proprietors  of 
manufacturing  establishments  in  different  sections  of  the  country,  the  following 
results  have  been  reported  to  the  commissioner.  In  the  first  instance,  out  of 
127  men  entering  the  army  from  an  iron  establishment  in  one  of  the  Middle 
States,  only  17  are  known  to  the  proprietors  to  have  resumed  their  former  occu- 
pations ;  and  in  the  second  instance,  out  of  16  leaving  a  manufactory  in  a  New 
England  State,  but  two  individuals  are  believed  to  have  returned.  Of  this 
deficit,  some  have  engaged  in  the  cultivation  of  cotton,  and  in  various  other 
industrial  pursuits  in  the  South ;  a  much  larger  percentage  have  sought  new 
homes  and  new  employments  at  the  extreme  West,  or  on  the  Pacific  coast ; 
while  others,  taking  advantage  of  the  capital  made  available  to  them  through 
the  payment  of  bounties  and  previous  savings,  have  become  principals  rather 
than  subordinates  in  business,  or,  in  cases  of  persons  of  foreign  birth,  have  re- 
turned to  the  countries  of  their  nativities." — "Report  of  David  A,  Wells  as 
Special  Commissioner  of  the  Revenue  for  1866,"  pp.  21,  22. 


LIQUIDATION  OF  WAR  ACCOUNTS. 


193 


terial ;  Ms  permanent  capital  bears  but  a  small  ratio  to  the 
total  of  his  transactions.  But  the  peinnanent  investment  of 
the  farmer  is  always  his  largest  investment,  and  the  industry  of 
agriculture  calls  for  twelve  months  for  the  completion  of  a  sin- 
gle process ;  from  which  it  follows  that  a  farmer  who  has  mort- 
gaged his  property  on  a  rising  market,  must  stand  the  loss 
of  paying  the  debt  while  prices  are  falling.  This  is  the  rea- 
son why  the  agricultural  interest  always  stands  opposed  to  a 
policy  of  contraction  more  strongly  than  either  the  manu- 
facturing or  commercial  interest.  Such  a  policy  bears  more 
heavily  upon  farmers  who  have  mortgaged  their  property 
than  upon  those  engaged  in  businesses  admitting  of  greater 
mobility  of  action.  Assuming,  then,  that  the  country  must 
suffer  the  evils  of  contraction,  it  seems  wise  to  undertake 
this  measure  when  the  lands  of  the  country  are  likely  to  be 
the  least  encumbered,  and  to  proceed  in  such  a  manner  as  to 
discourage  speculation  in  landed  property. 

It  may  serve  to  strengthen  the  argument  here  set  forth 
if  we  notice  the  movement  in  current  prices  during  the  con- 
tinuance of  our  late  war  and  for  a  few  years  after  its  close, 
as  presented  in  the  table  given  below.  It  is  believed  that 
the  commodities  selected  are  representative  of  classes,  whether 
one  consider  the  influence  of  changes  in  the  tariff  or  the 
modification  in  demand  occasioned  by  the  return  of  peace. 


Table  of  j^rices  quoted  on  the  New  York  market  for  January 
of  the  years  namecV 


Flour,  per  barrel 

Ashes,  per  100  pounds.. . 

Leather,  per  pound 

Sugar,  per  pound 

Pig-iron,  per  ton 

Lard,  per  pound 

Codfish,  per  quintal 

Wool  (fleece),  per  pound. 


1S61. 

1865. 

1863. 

1872. 

$5.35 

$16.00 

$10.00 

$6.50 

5.00 

11.75 

8.25 

9.00 

.10^ 

.42 

.25^ 

.35 

.06i 

.19 

•111 

.09 

21.00 

63.00 

36.00 

38.00 

.lOf 

.23 

.12i 

.091 

3.50 

9.00 

6.50 

5.00 

.30 

.95 

.60 

.TO 

1878. 


$4.90 

4.50 

.23 

.07^ 

26.00 

.071 

5.50 

.47 


'  Compiled  from  price  lists  in  "  Hunt's  Merchants'  Magazine "  and  "  Com- 
mercial and  Financial  Chronicle." 


194  NATIONAL  DEFICIT  FINANCIERING. 

It  would  be  quite  erroneous  to  assume  that  all  the  changes 
in  price  shown  by  the  above  table  are  due  to  fluctuations  of 
the  currency ;  indeed,  some  familiarity  with  the  commercial 
history  of  the  period  covered  is  necessary  to  derive  from  the 
figures  a  correct  impression.  The  rise  of  prices  during  the 
war,  which  a  comparison  of  the  first  and  second  columns 
brings  into  view,  is  observed  to  vary  for  various  articles 
from  100  to  300  per  cent,  and  may  be  fairly  charged  to  the 
policy  of  treasury  management  adojited  by  the  government. 
As  Mr.  Tooke  truly  says,  "  A  compulsory  government  paper, 
while  it  is  in  the  course  of  augmentation,  acts  directly  as  an 
originating  cause  on  prices  and  income  "  ;  and  if  proof  were 
needed  for  this  observation  it  might  be  furnished  by  the 
fact  that  the  gold  price  of  commodities,  estimated  upon  the 
basis  of  thirty  selected  articles  in  the  usual  manner,  was  2-3-i 
per  cent  lower  in  1865  than  in  1861.^  But  it  is  with  the 
year  1865  that  the  movements  in  price  become  for  us  the 
most  interesting.  It  is  well  known  that  the  policy  of  con- 
traction as  the  first  step  toward  the  resumption  of  specie 
payments  was  advocated  by  Secretary  McCulloch  in  his  first 
report,  and  that  a  law  authorizing  the  retirement  of  treasury 
notes  was  passed  in  the  early  part  of  1S66.  It  should  also 
be  remembered,  in  seeking  to  interpret  the  figures  given  in 
the  table,  that  the  Southern  States  had  no  currency  at  the 
close  of  the  rebellion,  and  that  the  drain  upon  the  Northern 
States  to  supply  this  deficiency  acted  like  a  further  contrac- 
tion of  the  volume  of  currency  for  the  North  itself. 

Let  us  now  compare  the  prices  of  the  year  1865  with 
those  of  1868  in  the  light  of  the  facts  just  mentioned.  We 
observe  them  to  be  somewhat  lower,  notwithstanding  that 
the  low  gold  prices  of  1865  permitted  a  slight  normal  in- 
crease, and  that  a  return  of  peace  demand  would  naturally 
engender  commercial  speculation.  This  seems  to  indicate 
that  the  law  which  permitted  treasury  notes  to  be  retired 

'  Cotton  is  excluded  from  this  estimate ;  were  cotton  included,  average 
prices  would  show  a  rise  of  6"57.  Cf.  "Journal  of  the  Statistical  Society  of 
Loudon,"  vol.  xxxi,  p.  221. 


LIQUIDATION  OF  WAR  ACCOUNTS.  195 

opposed  witli  some  success  the  tendency  toward  unhealtliy 
expansion  of  business.  But  such  a  result  was  repugnant  to 
large  numbers  of  men,  and  there  was  wide-spread  criticism 
of  the  Secretary  and  his  policy.  This  led  to  the  repeal  of 
the  law  in  February,  1868.  Prices  were  consequently  thrown 
open  to  the  full  influence  of  a  redundant  currency,  and  the 
result  may  be  traced  by  comparing  the  quotations  of  1868 
with  those  of  1872,  the  year  before  the  panic  burst  the  bub- 
ble of  prosperity  upon  which  the  dominant  party  congratu- 
lated itself  so  highly.  Had  the  treasury  been  managed  ac- 
cording to  sound  principles,  the  prices  of  1872  should  have 
been  lower  than  those  of  1868,  but  a  glance  at  the  table 
shows  them  to  have  been  a  trifle  higher.  The  exceptions  are 
wheat,  lard,  fish,  and  sugar,  all  agricultural  commodities. 
And  the  fall  in  sugar  is  partly  accounted  for  by  a  reduction 
of  the  tax,  while  the  fact  that  the  tax  on  iron  was  reduced 
shows  the  quotations  to  represent  inadequately  the  tendency 
toward  a  rise  in  that  commodity.  The  figures  in  the  last 
column  of  the  table,  being  for  the  year  1878,  may  be  said  to 
disclose  the  level  of  prices  upon  which  it  was  possible  for 
the  country  to  maintain  specie  payments. 

It  is  with  great  hesitation  that  I  am  willing  to  draw  im- 
portant conclusions  from  commercial  quotations.  So  many 
complications  enter  into  the  determination  of  prices  that  one 
must  exercise  the  greatest  care  in  reading  the  tendencies 
which  they  disclose.  But,  admitting  all  that  may  justly  be 
said  in  this  vein,  it  seems  that  the  table  presents  presumptive 
evidence  favorable  to  the  argument  for  a  speedy  contraction 
of  the  currency  when  the  necessity  for  forced  loans  has  passed 
away.  The  repeal  of  the  act  empowering  the  Secretary  of 
the  Treasury  to  redeem  treasury  notes  threw  down  the  barrier 
which  had  been  raised  against  the  full  efi*ects  of  inflation. 
In  1872  the  country  was  no  nearer  the  basis  of  specie  prices 
than  three  years  after  the  close  of  the  war.  Mortgages  mean- 
time had  piled  up,  business  had  been  extended  under  the 
influence  of  an  unnatural  stimulus,  and  the  country  paid  the 
penalty  by  the  panic  of  1873. 


196  NATIONAL  DEFICIT  FINANCIERING. 

Passing  now  from  further  consideration  of  tlie  necessity 
of  quickly  resuming  specie  payments,  what  may  be  said  re- 
specting the  most  appropriate  method  of  procedure  ?  Three 
plans  have  received  advocacy  from  both  publicists  and  states- 
men. 

The  first  of  these  is  the  plan  assumed  to  be  the  correct 
one  throughout  the  foregoing  discussion.  It  demands  such 
a  reduction  of  the  amount  of  money  afloat  that  prices  will 
be  brought  to  a  specie  basis,  for  then  only  can  foreign  tr*ade 
be  relied  upon  to  bring  specie  from  abroad,  or  to  retain  it  if 
mined  at  home.  It  thus  appears  that  the  maintenance  of 
specie  payments  is  very  closely  alKed  to  international  trade. 
Indeed,  one  of  the  chief  arguments  favoring  the  necessity  of 
a  return  to  the  basis  of  gold  and  silver  is  that  such  money, 
being  international  money,  is  self -regulating  in  amount ;  and 
that,  in  consequence,  the  country  will  not  be  subjected  to 
marked  fluctuations  in  prices  from  purely  domestic  causes. 
A  permanent  excess  of  currency  is  impossible  if  that  cur- 
rency be  such  that  foreign  people  will  accept  it  in  payment 
of  purchases ;  for  since  prices  are,  on  account  of  the  excess, 
higher  at  home  than  abroad,  those  who  hold  money  will 
prefer  to  purchase  abroad.  But  with  paper  money,  clothed 
with  the  power  of  legal  tender  at  home,  this  is  not  the  case. 
It  is  purely  local  in  character.  It  is  because  treasury  notes 
are  issued  in  such  amounts  that  all  domestic  exchanges  can 
be  carried  on  by  means  of  paper  money  that  specie  disap- 
pears from  circulation,  and  the  theory  of  resumption  now 
before  us  rests  for  its  defense  upon  the  fact  that  specie  can 
never  again  return  into  circulation  until,  through  the  reduc- 
tion of  the  number  of  treasury  notes  afloat,  it  is  needed  for 
domestic  trade.  It  is  for  this  reason  that  quick  resumption 
demands  arbitrary  contraction. 

But  it  may  be  asked  :  "VVhy  should  this  reduction  of  the 
currency  be  arbitrary?  Why  not  refuse  to  increase  the 
amount,  and  permit  the  necessities  of  the  country  to  grow 
up  to  its  use  ?  This  policy  was  favorably  received  by  Mr. 
Boutwell,  and  controlled  the  decisions  of  the  administration 


LIQUIDATION  OF  WAR  ACCOUNTS.  197 

SO  long  as  lie  remained  at  the  head  of  the  Treasury  Depart- 
ment.^ It  is,  however,  idle  to  suppose  that  the  evils  of  con- 
traction may  in  this  manner  be  avoided.  It  makes  no  differ- 
ence whether  the  amount  of  money  is  brought  down  to  the 
necessities  of  trade  upon  the  gold  basis,  or  that  trade  is  per- 
mitted to  grow  up  to  an  arbitrarily  established  amount  of 
money,  the  effect  upon  prices  is  in  either  case  the  same. 
The  real  point  at  issue  between  these  two  policies  of  resump- 
tion pertains  to  the  time  at  which  contraction  should  be  set 
on  foot,  and  the  rapidity  with  which  it  should  proceed.  Re- 
specting the  appropriate  time  for  beginning,  we  have  already 
discovered  that  immediate  contraction,  undertaken  at  the 
close  of  a  war,  will  shield  the  country  from  the  full  effect 
of  inflation ;  and  the  same  line  of  reasoning  permits  us  to 
conclude  that  hesitation  or  weakness  in  carrying  out  the 
policy  defeats  the  purpose  for  which  it  was  set  on  foot.  It 
is  a  case  where  speedy  recovery  is  sure  if  the  remedy  be 
severe.  The  evil  of  contraction  can  not  be  avoided  by  per- 
mitting the  disease  to  wear  itself  out,  while,  by  allowing 
matters  to  take  their  own  course,  the  recovery  of  healthy 
business  conditions  is  indefinitely  postponed. 

A  third  plan  for  the  resumption  of  specie  payments  calls 
for  the  accumulation  of  a  specie  reserve  in  the  treasury  vaults. 
As  a  subordinate  part  of  a  policy  of  contraction,  this  is 
wholly  defensible.  It  is  necessary  for  the  government  to  be 
in  possession  of  sufficient  cash  that  all  notes  presented  may 
be  promptly  paid.  But  the  accumulation  of  coin  is  not  of  it- 
self an  adequate  measure,  for  it  leaves  out  of  view  the  ques- 
tion of  prices.  However  men  may  desire  to  avoid  it,  prices 
within  a  country  must  come  down  to  the  world's  prices,  or 
the  world's  money  can  not  be  used.  Suppose  an  accumula- 
tion of  specie  equal  to  the  entire  amount  of  outstanding 
treasury  notes,  the  country  might  be  as  far  from  resumption 
as  when  the  accumulation  began.  Any  attempt  to  substi- 
tute the  specie  for  the  notes  would  be  followed  by  heavy  ex- 

>  Cf.  "  Report  on  the  Finances,"  1872. 
14 


198  NATIONAL  DEFICIT  TINANCIERING. 

portations  of  bullion,  and  the  country  would  be  obliged  to 
get  along  with  so  much  as  it  could  retain  in  trade  when  its 
prices  had  fallen  to  the  level  of  the  prices  of  other  countries. 
The  pressure  of  falling  prices  must  come,  and  the  only  occa- 
sion for  deliberation  is  to  discover  the  time  at  which  con- 
traction will  cause  the  least  disaster. 

It  may  be  interesting  in  this  connection  to  notice  the 
changes  of  policy  that  have  attended  the  steps  toward  re- 
sumption in  the  United  States.  The  attitude  of  Secretary 
McCulloch  has  been  already  referred  to,  and  the  sentiment 
of  Congress  in  the  latter  part  of  1865  seems  to  have  been  in 
complete  harmony  with  the  views  of  the  Cabinet.  But  from 
the  report  of  1866,  it  appears  that  the  Secretary  did  not  con- 
sider his  policy  to  have  been  supported  by  adequate  legisla- 
tion.    He  says : 

The  Secretary  regrets,  notwithstanding  the  large  reduction 
of  the  national  debt,  and  the  satisfactory  condition,  in  other 
respects,  of  the  national  treasury,  that  little  progress  has  been 
made  since  his  last  report  toward  specie  payments.  The  views 
presented  by  him  in  that  report,  although  indorsed  in  the 
House  of  Representatives  by  a  nearly  unanimous  vote,  were 
not  sustained  by  corresponding  legislation.  Instead  of  being 
authorized  to  reduce  the  paper  circulation  of  the  country,  ac- 
cording to  his  recommendations,  the  amount  of  the  United 
States  notes  which  he  was  permitted  to  retire  was  limited  to 
$10,000,000  for  the  six  months  ending  October  12,  and  to 
$4,000,000  per  month  thereafter.^  In  the  mean  time,  the  re- 
duction of  these  notes,  and  the  notes  of  the  State  banks,  has 
been  nearly  balanced  by  the  increase  of  the  circulation  of  the 
National  banks,  and  sjDecie  commands  about  the  same  premium 
it  did  when  the  last  treasury  report  was  prepared. 

It  seems,  then,  that  such  influence  as  was  exerted  by  the 
policy  of  contraction  made  itself  felt  through  the  declara- 
tion of  the  policy  rather  than  by  means  of  actual  contraction 
of  the  amount  of  notes  afloat.  It  is  probable  that  the  check 
in  the  rise  of  prices,  observed  immediately  after  the  war,  is 
largely  due  to  the  demand  for  currency  in  the  South  and  on 
the  Pacific  slope. 

'  Law  of  April  12,  1866,  Sec.  1. 


LIQUIDATION  OF  WAR  ACCOUNTS.  199 

The  authority  of  the  Secretary  to  retire  treasury  notes 
was  "  suspended  "  by  an  act  of  February  4,  1868,  a  measure 
which  did  not  meet  witli  the  approval  of  the  President,  and 
which  became  a  law  through  his  failure  to  return  the  bill  to 
Congress  within  the  time  prescribed  by  the  Constitution.  It 
would,  however,  be  an  error  to  interpret  this  as  an  abandon- 
ment of  the  policy  of  resumption.  Upon  March  18,  1869,  a 
law  was  enacted  pledging  the  United  States,  in  all  cases 
where  the  wording  of  the  contract  admitted  of  doubt,  to  pay- 
ment in  coin  or  its  equivalent  of  all  public  obligations ;  and 
further  declaring  that  treasury  notes  should  be  redeemed  in 
.specie  before  the  payment  of  any  part  of  interest-bearing 
obligations  not  due  at  the  date  of  the  act,  unless  some  bonds 
bearing  a  lower  rate  of  interest  than  the  bonds  to  be  re- 
deemed could  be  sold  at  par  in  coin. 

From  this  time  until  1874  the  sentiment  of  the  country 
found  expression  in  the  policy  set  forth  by  Secretary  Bout- 
well.  This  statesman  proposed  to  let  matters  run  themselves, 
in  order  that  the  credit  of  the  country  might  be  safe,  and 
exports  come  to  overbalance  imports ;  ^  for  then,  he  claimed, 

'  "  The  ability  of  the  country  to  resume  specie  payments  will  not  be  due  to 
any  special  legislation  upon  that  subject,  but  to  the  condition  of  its  industries, 
and  to  its  financial  relations  to  other  countries.  These,  of  course,  will  be  more 
or  less  dependent  upon  the  general  policy  of  the  government.  The  war  ex- 
hausted the  country  of  its  material  wealth,  and  the  States  of  the  South  were 
literally  impoverished.  A  necessary  condition  for  the  resumption  of  specie  pay- 
ments was  the  development  of  the  industry  of  the  nation,  both  South  and  North, 
and  the  consequent  accumulation  of  the  movable  products  of  industry  to  such 
an  extent  that  exports  of  those  products  should  be  equal  substantially  to  our 
imports.  So  long  as  it  is  necessary  to  pay  for  merchandise  imported,  by  the 
transfer  of  government  bonds  or  other  evidences  of  indebtedness  to  other  coun- 
tries, so  long  it  will  be  impracticable  to  resume  and  maintain  specie  payments. 
When  the  products  of  industry  exported  shall  be  equal  substantially  to  the  prod- 
ucts of  other  countries  imported,  there  will  be  no  demand  for  specie  for  export, 
except  what  may  arise  from  the  circumstance  that  our  bonds  held  abroad  are 
sent  home,  sold  in  our  markets,  and  the  proceeds  exported  in  coin.  When  the 
credit  of  the  country  shall  be  fully  established  in  Europe,  and  there  shall  be  no 
doubt  either  of  our  ability  or  disposition  to  meet  all  our  obligations,  bonds  here- 
tofore, and  now  to  a  large  extent,  held  by  merchants  and  bankers,  will  be  trans- 
ferred to  capitalists  for  permanent  investments.     When  this  change  shall  have 


200  NATIONAL  DEFICIT  FINANCIERING. 

there  would  be  no  danger  of  bonds  being  sent  home  from 
Europe  as  tbe  result  of  a  scare,  and  resumption  could  take 
place  witb  no  stock  to  business.  "  It  is  probable,"  said  the 
Secretary,  "  that  some  decrease  in  the  volume  of  paper  will 
ultimately  be  necessary,"  and  he  proposed  that  Congress 
should  authorize  the  redemption  of  notes  "  not  exceeding  two 
millions  of  dollars  in  any  one  month."  It  was  also  suggested 
that  the  contract  upon  which  the  five-twenty  bonds  were 
issued  should  be  so  changed  as  to  adapt  them  for  permanent 
investments  rather  than  commercial  paper,  and  that  a  subsidy 
should  be  granted  to  shipping,  and  higher  protective  duties 
to  iron,  wool,  and  cotton,  so  as  to  "  affect  favorably  the  bal- 
ance of  trade." 

The  policy  of  resumption  advocated  by  Secretary  Bristow 
brings  to  view  one  point  of  pecuhar  interest.  He  stated  it  as 
a  fundamental  idea  that  the  banks  and  the  people  could  not 
prepare  for  resumption  "  so  long  as  the  large  amount  of  ir- 
redeemable paper  now  in  circulation  continues  to  be  by  law 
legal  tender  for  all  private  debts  with  reference  both  to  the 
past  and  the  future.  While  this  state  of  things  lasts,  gold 
will  continue  to  flow  from  us,  and  find  employment  where 
the  natural  laws  of  trade,  unobstructed  by  restraining  legis- 
lation, make  its  daily  use  indispensable."  It  was,  therefore, 
proposed  to  take  from  the  notes  their  legal-tender  character 
for  all  contracts  entered  into  after  a  specified  date,  and  then, 
after  the  lapse  of  a  definite  time  (three  years  was  regarded 
as  sufficient),  to  undertake  the  redemption  of  notes  in  specie. 
It  was  also  advocated  that  the  law  should  provide  for  the 
conversion  of  notes  into  interest-bearing  bonds,  as  also  for 
the  sale  of  bonds  equal  to  the  entire  amount  of  notes  out- 
standing less  available  surplus  in  the  treasury. 

taken  place,  the  probability  of  our  securities  being  sent  home  under  the  influ- 
ence of  political  or  financial  disturbances  in  Europe  will  be  very  slight ;  and 
when,  as  a  concurring  fact,  our  exports,  exclusive  of  public  securities,  shall  be 
equal  to  our  imports,  specie  payments  may  be  resumed  without  even  a  tempo- 
rary embarrassment  to  the  business  of  the  country." — "  Report  of  the  Finances 
for  1869,"  pp.  xiii  and  xiv. 


LIQUIDATION  OF  WAR  ACCOUNTS.  201 

The  plan  of  resumption  wMcli  comes  into  comparison 
with  these  views  is  the  one  embodied  in  the  law  of  January 
14,  1875,  according  to  which  the  return  to  specie  payments 
was  actually  accomplished.  This  law  did  not  modify  in  any 
way  the  legal-tender  quality  of  such  notes  as  were  permitted 
to  remain  in  circulation,  but  provided  that  their  excess  above 
$300,000,000  might  be  converted  into  notes  of  the  ISTational 
banks  at  a  fixed  ratio,  which  notes,  it  will  be  remembered, 
are  not  a  legal  tender.^  This  was  done  by  removing  the 
restriction  placed  upon  the  issue  of  bank-notes,  and  requiring 
the  Secretary  of  the  Treasury  to  redeem  United  States  notes 
equal  to  eighty  per  cent  of  the  new  issues.  It  thus  appears 
that  the  general  purpose  of  the  Secretary,  to  reduce  the 
quantity  of  legal-tender  paper  below  the  amount  necessary 
to  carry  on  domestic  exchanges,  was  realized.  Tet  there  is 
a  difference  between  his  plan  and  that  embodied  in  the  law. 
Had  the  plan  of  Secretary  Bristow  been  adopted,  the  treas- 
ury department  would  have  been  converted  into  an  ordinary 
bank  of  issue;  but,  by  the  plan  embodied  in  the  law,  the 
government  escaped  the  necessity  of  issuing  notes  that  cir- 
culate merely  because  they  are  redeemable  in  legal  money, 
while  at  the  same  time  it  retained  the  advantage  of  furnish- 
ing the  pubhc  with  so  much  of  the  paper  circulation  as  under 
no  circumstances  will  be  presented  for  payment  in  specie. 
In  this  manner  the  law  provided  for  elasticity  in  the  circu- 
lating medium,  while  retaining  a  considerable  portion  of  the 
debt  in  use  as  money,  and  for  this  reason  are  we  constrained 
to  approve  the  law  rather  than  the  plan  submitted  by  the 
Secretary. 

For  the  rest,  the  provisions  of  the  law  were  very  simple. 
Free  coinage  of  gold  was  established  in  place  of  a  charge  of 
one  fifth  of  one  per  cent.  The  1st  of  January,  1879,  was 
designated  as  the  day  upon  which  payments  in  specie  would 
be  resumed,  and  the  Secretary  was  authorized  to  sell  bonds 

'  The  amount  outstanding  in  1874  was  $440,900,000,  of  which  $58,930,000 
had  not  been  put  into  circulation. — "Report  on  the  Finances  for  1874,"  p.  383. 


202  NATIONAL  DEFICIT  FINANCIERING. 

in  order  to  secure  gold  "  to  the  extent  necessary  to  carry  this 
act  into  full  effect."  The  act  was  simple  and  courageous, 
and  the  only  criticism  that  may  be  offered  upon  it  is  that  it 
was  so  long  delayed. 

The  analysis  of  this  chapter  permits  us  to  adopt  the  fol- 
lowing conclusions : 

Floating  debts  at  the  close  of  a  war  should  receive  im- 
mediate attention,  because  they  weigh  more  heavily  on  public 
credit  than  other  forms  of  obligations,  and  because  *their 
maintenance  opposes  the  quick  and  easy  establishment  of 
sound  business  relations. 

If  a  country  emerge  from  a  war  burdened  with  irredeem- 
able paper  notes,  it  is  wise  to  set  on  foot  at  once  a  policy  of 
contraction,  since  in  this  manner  the  country  may  hope  to 
evade  the  full  consequences  of  an  inflated  currency. 

We  were  also  led  to  approve  the  principle  underlying  the 
law  for  the  resumption  of  specie  payments,  by  which  the 
United  States  came  back  to  a  sound  monetary  basis. 


CHAPTEE  lY. 

PEACE   MANAGEMENT   OF   A   PUBLIC   DEBT. 

Theee  can  be  no  controversy  respecting  the  purpose  tliat 
sliould  control  tlie  management  of  a  public  debt  in  time  of 
peace.  The  payments  entailed  are  a  continuous  drain  upon 
the  productive  resources  of  the  people,  and  it  consequently 
becomes  the  duty  of  the  financier  to  lighten  by  every  honest 
means  the  burdens  thus  imposed.  Under  the  guidance  of 
such  a  purpose,  we  are  led  to  recognize  three  ideas  which 
may  properly  direct  the  peace  policy  of  any  government. 

1.  The  evils  of  a  debt  may  be  mitigated  if  public  obliga- 
tions are  made  to  perform  some  useful  service, 

2.  The  burden  of  a  debt  may  be  lightened  by  reducing 
the  rate  of  interest  paid. 

3.  The  burden  of  a  debt  may  be  extinguished  by  repay- 
ment of  the  capital  borrowed. 

Three  distinct  problems  are  thus  introduced ;  the  first 
pertains  to  the  profitable  use  of  the  debt,  the  second  to  the 
conversion  of  the  debt,  and  the  third  to  the  payment  of  the 
debt.  The  last  of  these  is  of  sufficient  importance  to  claim 
for  itself  a  separate  chapter,  the  others  will  be  taken  into 
immediate  consideration. 

Profitable  Use  of  Public  Debts. 

A  public  debt  comes  to  be  of  general  convenience  when 
of  such  form  and  character  as  to  serve  the  purpose  of  invest- 
ments, or  as  the  basis  of  contracts.  It  should  then  be  the 
first  object  of  the  financier  to  so  fashion  the  public  contracts 


204  NATIONAL  DEFICIT  FINANCIERING. 

under  which  a  debt  is  held  as  to  meet  the  demands  of  com- 
mercial transactions.  It  does  not  seem  necessary  to  enumer- 
ate and  classify  the  various  investors  in  public  bonds  whose 
needs  should  be  consulted.  Such  a  classification  would  in- 
clude men  who  desire  to  Kve  from  the  proceeds  of  past  accu- 
mulations, trustees  with  estates  to  manage,  corporations 
whose  business  demands  temporary  investments  and  securi- 
ties that  can  be  quickly  turned,  besides  others  that  will  read- 
ily suggest  themselves  to  the  reader.  To  serve  in  the  high- 
est degree  these  several  demands,  the  entire  debt  policy 
must  be  clear  and  simple.  Good  financiering  will  avoid  an 
involved  scheme  of  funding,  like  that,  for  example,  adopted 
by  Mr.  Harnilton  in  reorganizing  the  Revolutionary  debt. 
Such  a  scheme  may  be  good  for  speculative  purposes  but 
not  for  permanent  investment.  The  creditor,  also,  should 
be  granted  every  possible  security  against  loss  by  fire  or 
theft;  and  to  this  end  it  is  advisable  to  apply  as  far  as 
possible  the  policy  of  registration  which  provides  two  dis- 
tinct evidences  of  indebtedness.  In  this  regard  the  plan 
adopted  by  the  United  States  is  worthy  of  full  commenda- 
tion, which  permits  any  holder  of  coupon  bonds  to  convert 
them  into  reo-istered  bonds  at  will. 

The  general  principle  that  should  control  in  giving  shape 
to  a  debt  in  time  of  war  has  been  already  discussed.  The 
government,  as  a  seller  of  debts,  desires  to  secure  the  highest 
possible  price  for  its  obligations,  and  to  that  end  should  con- 
sult the  wishes  of  its  customers  ;  but  the  application  of  this 
principle  in  time  of  peace  does  not  call  for  so  great  a  variety 
of  debt  paper  as  during  the  continuance  of  a  war.  !N"or  is  it 
necessary  that  temporary  expedients  during  a  period  of 
quiet,  should  exert  as  great  an  influence  upon  the  form  of 
the  debt  as  in  times  of  exigency. 

But  how,  it  may  be  asked,  is  a  financier  to  know  if  the 
form  of  obligations  meets  the  wishes  of  the  purchasing  pub- 
lic ?  There  is,  upon  this  point,  a  sure  test.  Assuming,  of 
course,  the  credit  of  the  government  to  be  stable,  public 
stocks  ought  always  to  be  quoted  higher  than  the  correspond- 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      205 

ing  stocks  of  private  concerns.  This  will  be  readily  recog- 
nized when  one  notices  the  difference  in  the  nature  of  the 
risk  in  the  two  sorts  of  securities.  A  railroad  bond,  for  ex- 
ample, and  a  public  bond  are  alike  in  this,  that  neither  is  evi- 
dence of  ownership  in  any  particular  thing,  but  both  testify 
to  proprietorship  in  a  specific  claim.  The  difference  be- 
tween them  is,  that  the  proprietor  of  the  former  lays  claim 
to  a  definite  portion  of  the  earnings  of  a  particular  industry  ; 
while  the  proprietor  of  the  latter  has  a  lien  upon  the  prod- 
uct of  the  general  industries  of  the  country.  Some  acci- 
dent in  the  particular  industry  considered,  or  a  period  of 
commercial  depression,  may  deplete  the  fund  out  of  which  the 
holder  of  private  stocks  is  paid  ;  but  nothing  short  of  a  na- 
tional calamity  can  extinguish  the  fund  out  of  which  the 
holder  of  public  stocks  secures  his  annuity.  Public  stocks, 
therefore,  rest  upon  a  broader  basis  than  private  stocks ; 
they  involve  less  commercial  risk,  and  for  that  reason  should 
be  quoted  relatively  higher.  Whenever  this  is  not  the  case, 
there  is  just  ground  for  criticising  the  administration  of  the 
Treasury  Department. 

It  may  be  objected  that  the  rule  here  laid  down  panders 
to  the  interests  of  the  bond-holding  class,  but  a  moment's 
consideration  will  show  such  an  objection  to  be  altogether 
untenable.  It  is  assumed  that  no  favor  will  be  shown  the 
public  creditor  detrimental  to  the  public  interest.  The  only 
question  here  under  consideration  is  how  the  debt  may  be 
made  serviceable  while  it  exists,  and  in  all  that  has  been  said 
the  superior  right  of  the  tax-payer  has  been  held  in  view. 

But  of  more  importance  than  this  is  the  thought  that  by 
adjusting  the  public  bonds  to  the  wants  of  investors  they 
will  rise  in  price.  The  supply  being  a  known,  limited,  and 
perhaps  a  decreasing  quantity,  the  more  widely  spread  the 
demand,  the  higher  will  be  the  quotations  of  public  obliga- 
tions. The  full  advantage  of  this  will  not  be  seen  until  we 
have  studied  the  question  of  conversion  of  public  debt ;  yet 
this  much  may  be  said  at  the  present  time,  that  the  higher 
the  price  of  the  bonds,  the  less  will  be  the  rate  of  interest 


206  NATIONAL  DEFICIT  FINANCIERING 

with  whicli  the  public  creditors  express  themselves  satisfied. 
If,  then,  no  obstacle  lie  in  the  way,  the  government,  by  an 
appreciation  of  its  bonds,  finds  itself  in  a  position  to  borrow 
money  at  cheaper  rates  with  which  to  pay  its  old  creditors, 
and  so  save  the  difference  in  interest.  It  thus  appears  that 
by  meeting  the  wants  of  investors  the  financier  is  taking 
steps  which  will  eventually  permit  a  decrease  of  the  burden 
of  the  debt. 

Another  question  which  presents  itself  naturally  in  tjiis 
connection  pertains  to  the  use  of  public  bonds  as  the  basis  of 
public  banking.  It  is  now  quite  generally  admitted  that 
governments  should  in  some  manner  control  the  issue  of 
notes  used  as  money.  It  would  be  out  of  place  in  this  essay 
to  discuss  the  relative  merits  of  bank  bills  and  treasury  notes, 
but,  assuming  that  banking  establishments,  as  centers  of  issue, 
are  a  necessary  part  of  the  commercial  mechanism,  the  wis- 
dom of  employing  public  stocks  as  the  basis  of  such  issues 
will  hardly  be  denied.  This  fact  discloses  a  new  principle 
for  shaping  the  administration  of  a  public  debt  in  time  of 
peace.  It  should  be  the  purpose  of  the  financier  to  main- 
tain harmony  between  the  banking  laws  and  those  laws 
which,  in  their  working,  subject  the  debt  to  continuous 
modification,  so  that,  while  the  debt  lasts,  the  banking  estab- 
lishment may  never  become  embarrassed.  In  this  respect 
the  policy  of  the  United  States  is  open  to  fair  criticism ;  but 
as  the  problem  suggested  pertains  primarily  to  the  manage- 
ment of  the  sinking-fund,  its  discussion  may  with  advantage 
be  postponed  until  that  subject  claims  our  attention. 

But  there  remains  one  question  respecting  the  profitable 
use  of  public  debts  that  can  not  be  thus  lightly  passed.  One 
at  all  acquainted  with  business  knows  to  what  extent  gov- 
ernment bonds  are  used  as  pledges  for  the  fulfillment  of 
commercial  engagements.  Purchases,  in  the  ordinary  course 
of  trade,  are  seldom  made  with  cash,  nor  is  any  great  enter- 
prise set  on  foot  without  creating  against  it  many  obligations. 
Among  the  many  forms  of  collateral  securities  none  take 
precedence  of  the  promises  of  a  well-established  government. 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      207 

and  it  is  easy  to  perceive  their  peculiar  fitness  for  this  service. 
The  annuity  which  they  pay  is  independent  of  any  particular 
business  venture,  their  amount  can  not  be  increased  or  de- 
creased without  full  knowledge  on  the  part  of  the  public, 
they  are  as  easily  sold  as  any  other  sort  of  paper,  while  any 
change  in  their  permanent  price  will  probably  enhance  their 
value ;  it  is  for  such  reasons  that  public  paper  is  so  readily 
accepted  as  business  security. 

This  fact,  that  public  secarities  are  closely  interwoven 
with  business  transactions,  brings  to  view  a  most  important 
question  of  treasury  management.  Stated  in  its  broadest 
form  it  is  as  follows :  Is  it  wise  to  grant  the  minister  of 
finance  any  discretion  in  the  control  of  the  debt,  or  should 
a  treasury  pohcy  be  permanently  fixed,  legally  declared,  and 
invariably  followed  ?  The  occasion  upon  which  the  admin- 
istration will  be  likely  to  receive  strong  appeals  to  depart 
from  its  ordinary  rules  is  the  advent  of  a  commercial  panic. 
All  grades  of  securities  then  fail  to  find  purchasers,  and 
many  men  whose  assets  exceed  their  liabilities  stand  in  dan- 
ger of  commercial  ruin.  The  diflSculty  arises  from  the  fact 
that  extensive  liabilities  are  an  essential  part  of  business  life, 
and  that  failure  to  meet  one's  obligations  the  moment  they 
become  due  is  confession  of  bankruptcy ;  it  must  therefore 
follow,  when  men  feel  any  pressure  coming  upon  the  money 
market,  that  they  will  hold  on  to  what  cash  they  may  have 
and  endeavor  by  all  means  to  secure  more.  That  which 
is  in  universal  demand  is  money ;  that  which  is  offered 
for  money  is  securities  of  all  sorts,  and  among  them  pub- 
lic obhgations.  "When  it  is  discovered  that  the  ordinary 
purchases  of  securities  are  not  made,  the  wildest  excitement 
is  apt  to  prevail,  and  every  creditor  hastens  to  his  debtor 
demanding  immediate  payment,  and  payment  is  cash.  Con- 
fidence is  lost  in  men  because  confidence  is  lost  in  securities ; 
fear  and  suspicion,  like  a  contagious  disease,  spread  from 
mind  to  mind,  and  the  country  finds  itself  without  warning 
in  the  fever  heat  of  a  commercial  panic.  At  such  times  it 
does  no  good  to  philosophize  about  panics.    Something  must 


208  NATIONAL  DEFICIT  FINANCIERING. 

be  done  to  calm  excitement  and  to  allay  suspicion,  for  so 
intimate  are  business  relations  that  the  innocent  and  the 
blameworthy  are  alike  ruined  by  failure  of  confidence. 

The  first  thought  that  suggests  itself  to  men  under  such 
circumstances  is  to  appeal  to  government  for  relief.  But 
what  can  a  government  do?  The  usual  resort  of  writers, 
when  discussing  the  theory  of  panics  and  their  relation  to 
government  policies,  is  to  the  history  of  the  English  Bank 
Act  of  1844 ;  but  so  frequently  has  the  public  been  enter- 
tained by  a  recital  of  this  dull  chapter  in  financial  contro- 
versy that  I  venture  to  assume  an  acquaintance  with  its 
main  features  on  the  part  of  my  readers.  This  history  is, 
however,  pertinent  to  the  question  in  hand,  for  it  places  be- 
yond reasonable  doubt  the  ability  of  a  government  to  allay 
a  panic  by  making  its  appearance  in  a  judicious  manner 
upon  the  money  market.  In  England  this  end  is  secured 
through  a  suspension  of  the  Bank  Act,  the  virtual  effect  of 
which  is  to  permit  the  bank  to  issue  notes  without  the 
usual  deposit  of  gold.  This  creates  the  impression  that  any 
person  who  holds  good  commercial  or  government  paper  can 
procure  as  much  money  as  he  needs,  and  the  result  is  that 
cash  is  no  longer  hoarded ;  for  one  of  the  strange  things 
about  a  panic  is  that  as  soon  as  cash  is  freely  offered  no  one 
wants  it. 

But  this,  it  is  said,  has  nothing  to  do  with  the  manage- 
ment of  a  public  debt ;  and,  so  far  the  United  States  is 
concerned,  the  Federal  government  can  not  suspend  a  law 
which  requires  a  deposit  of  gold  for  evei-y  note  issued,  for 
it  has  no  such  law.  The  propriety  of  thus  referring  to  the 
English  Bank  Act  will  be  perceived  when  it  is  learned  that 
there  are  those  who  believe  the  Federal  government  is  in  a 
position  to  exert  an  analogous  influence  upon  the  money 
market,  by  a  departure  from  the  ordinary  rules  of  manag- 
ing its  public  debt.  It  must  be  held  firmly  in  mind  that 
the  failure  of  confidence  in  times  of  panic  does  not  so  much 
attach  to  men  as  to  their  ability  to  negotiate  securities,  and 
that  the  offer  of  ready  money  upon  the  market  is  able  to 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      209 

overcome  this  distrust.  !N^ow  it  is  claimed  that  a  govern- 
ment that  carries  a  great  debt,  and  which  controls  the  issue 
of  notes,  is  in  a  position  to  grant  relief  in  times  of  pressure, 
and  this  in  three  ways.  It  maj  anticipate  interest  payments 
upon  its  own  debt ;  it  may  employ  its  surplus  revenue  by 
unusual  purchases  of  public  securities ;  and  it  may,  provided 
any  law  grant  such  authority,  offer  to  purchase  bonds  to 
unlimited  amounts  by  an  issue  of  legal-tender  notes.  This 
third  plan  is,  for  all  practical  purposes,  an  offer  to  convert 
interest-bearing  bonds  into  legal-tender  notes  bearing  no 
interest.  These  measures  would  undoubtedly  arrest  a  panic, 
provided  they  were  able  to  create  the  impression  that  the 
government  was  willing  to  furnish  a  sufficient  amount  of 
paper  clothed  with  the  legal  power  of  paying  debts. 

It  must  be  admitted  that  there  are  certain  objections 
against  any  interference  on  the  part  of  the  state.  Many 
would  urge  that,  by  such  a  measure,  the  government  over- 
steps its  proper  functions ;  but  this  is  certainly  begging  the 
question,  for  it  assumes  some  fixed  rule  determining  proper 
functions.  With  more  reason  may  it  be  argued  that  a  dan- 
gerous power  is  entrusted  to  the  administration  when  he  who 
controls  the  public  debt  can  fashion  the  treasury  policy  to 
meet  the  changing  demands  of  a  market.  There  are  men 
whose  political  creed  is  bound  up  in  the  word  "  friendship  "  ; 
might  it  not  then  easily  occur  that  political  friends  would 
be  served,  and  political  foes  be  refused  assistance,  and  in  this 
manner  the  discretion  granted  the  minister  of  finance  be 
turned  to  the  account  of  electioneering  ?  There  is  undoubt- 
edly this  danger,  but,  before  conceding  this  argument  to  be 
final,  it  may  be  well  to  inquire  if  it  is  the  part  of  wisdom 
to  refuse  an  administration  the  liberty  to  render  a  positive 
service  because  that  liberty  may  be  abused.  This  question 
is  at  bottom  one  of  political  philosophy,  and  may  not  claim 
our  present  attention  ;  it  will  probably  be  answered  accord- 
ing as  the  reader  has  adopted  the  restrictive  or  the  extensive 
theory  of  governmental  functions.  For  my  own  part,  I  be- 
lieve that  good  government  is  more  likely  to  be  secured  by 


210  NATIONAL  DEFICIT  FINANCIERING. 

increasing  personal  responsibility  than  by  restricting  the 
functions  of  the  state  within  such  narrow  limits  that  only 
men  of  ordinary  strength  of  character  and  inferior  talent 
will  be  drawn  to  a  public  career ;  I  must,  therefore,  regard  as 
untenable  this  argument  for  refusing  any  discretion  to  the 
Secretary  of  the  Treasury  in  the  management  of  a  public  debt. 

Tet  another  thought  stands  opposed  to  the  appearance 
of  the  financier  upon  the  money  market.  It  may  be  said 
that  there  is  danger  in  thus  magnifying  the  ability  of  the 
government  to  grant  assistance  in  times  of  panic.  The  policy 
of  aiding  solvent  firms  would  encourage  recklessness  in  busi- 
ness management,  and  thus  multiply  the  occasions  on  which 
assistance  would  be  demanded.  This,  however,  does  not 
seem  to  have  been  the  result  in  England,  where  it  now  stands 
as  an  unwritten  law  that  the  Bank  Act  shall  be  suspended 
whenever  demanded  by  the  exigencies  of  the  market.  Nor 
can  one  easily  understand  how  such  a  result  should  follow. 
A  panic  is  not  a  corner ;  it  can  not  be  manipulated  into  ex- 
istence. The  purpose  of  governmental  assistance  in  sustain- 
ing those  who  are  engaged  in  sound  business  enterprises,  is  to 
prevent  their  being  involved  in  the  ruin  that  follows  the 
collapse  of  worthless  securities ;  how,  then,  may  one  justly 
conclude  that  an  expression  of  willingness  to  render  such 
assistance  as  this  will  encourage  men  to  fly  the  kites  of  specu- 
lation? Indeed,  the  reverse  of  this  will  be  true.  Specula- 
tive methods  are  encouraged  when  business  is  so  organized 
that  the  fall  of  a  reckless  firm  may  bring  ruin  upon  a  house 
whose  methods  are  sound.  So  long  as  speculation  succeeds, 
it  is  the  source  of  high  profit,  and,  if  the  danger  arising  out 
of  it  is  common  to  all  men,  each  will  feel  the  temptation  to 
indulge  in  reckless  ventures.  It  is  the  knowledge  that  a 
business  will  stand  upon  its  own  merits  in  the  day  of  trial 
that  holds  out  the  best  inducement  to  conservative  manage- 
ment, and  this  may  be  obtained  by  providing  for  the  ready 
conversion  of  all  good  securities  into  cash  on  demand. 

But,  turning  to  the  second  point :  Will  the  habit  of  too 
great   dependence  upon  government  be  engendered  if  the 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      211 

state  proffer  its  assistance  to  solvent  fii-ms  ?  AVithoiit  doubt 
the  administration  sliould  not  be  officious  in  granting  its  aid, 
nor  offer  this  upon  such  favorable  terms  that  men  will  relax 
their  exertions  to  extricate  themselves  from  difficulties.  This 
seK-help  in  time  of  panic  can  only  come  through  an  agreement 
on  the  part  of  the  banks  to  accept  something  besides  legal 
tender  in  the  settlement  of  balances.  Thus,  in  the  panic  of 
1873,  the  clearing-house  of  New  York  city  rendered  marked 
service  by  creating  a  paying  medium,  receivable  between  the 
banks,  to  the  amount  of  $20,000,000.  But  such  an  action 
as  this  can  not  reach  the  heart  of  the  immediate  difficulty, 
and  arrest  a  panic  before  it  shall  have  caused  the  downfall 
of  many  solvent  houses ;  for  it  must  necessarily  be  slow,  rest- 
ing as  it  does  upon  the  deliberation  and  consent  of  a  large 
body  of  men ;  nor  is  it  adequate  to  allay  that  unreasoning 
fear  which  impels  every  man  to  demand  cash.  Nothing 
can  do  that  but  cash  in  sight.  Thus,  while  this  objection  is 
very  pertinent  in  suggesting  one  of  the  rules  according  to 
which  assistance  should  be  rendered  (as  will  shortly  be 
shown),  it  does  not  oblige  one  to  deny  the  wisdom  of  any 
assistance  whatever. 

The  principles  that  should  control  in  adapting  the  man- 
agement of  a  dei3t  to  the  temporary  relief  of  the  market  may 
perhaps  be  the  most  advantageously  discussed  by  a  study  of 
the  action  of  the  Federal  officials  during  the  panic  of  1873. 
It  will  be  remembered  that  this  panic  was  precipitated  by 
the  failure  of  Jay  Cooke  &  Co.,  on  Thursday  of  the  third 
week  in  September,  and  upon  the  Friday  following,  known 
as  "  Black  Friday,"  there  was,  in  the  city  of  New  York,  a 
general  collapse  of  banking-houses  whose  solvency  had  been 
to  this  time  unquestioned.  Upon  Saturday  there  was  a  ru- 
mor that  Secretary  Eichardson  would  deposit  810,000,000 
in  the  banks  of  the  city,  so  as  to  furnish  ready  cash ;  this 
caused  a  momentary  feeling  of  confidence,  but  distrust  again 
returned  as  soon  as  it  was  known  that  the  rumor  was  "^athout 
basis.  The  President  came  to  New  York  on  the  evening  of 
Saturday,  and  held  a  consultation  with  the  prominent  mon- 


212  NATIONAL  DEFICIT  FINANCIERING. 

eyed  men  respecting  the  assistance  which  the  administi'ation 
might  render.  Nothing  was  definitely  decided  until  the 
advent  of  the  Secretary  of  the  Treasury,  but  on  Monday 
notice  was  given  that  the  Government  would  employ  its  sur- 
plus revenue  in  the  purchase  of  five-twenty  bonds,  paying 
therefor  in  greenbacks  the  par  value  of  the  bonds  estimated 
in  gold.  This  was  a  modification  of  the  treasury  policy  to 
meet  a  temporary  demand  of  the  market,  for  it  did  away 
with  the  purchase  at  stated  days  and  in  sealed  envelopes,  and 
offered  to  take  all  bonds  that  should  be  presented  at  an  ad- 
vertised price.  It  should  be  noticed,  however,  that  the  sur- 
plus revenue  was  only  $14,000,000,  and,  in  consequence,  that 
this  offer  to  furnish  money  was  a  limited  offer.  Later,  the 
government  acceded  to  the  appeals  of  the  street,  and  pro- 
posed to  anticipate  the  payment  of  November  interest  upon 
the  public  debt— a  measure  which  placed  some  $8,000,000 
within  the  reach  of  those  who  desired  money.  If  the  pre- 
vious discussions  of  the  general  principles  involved  have  been 
accepted,  no  objection  can  be  made  to  the  purpose  that  in- 
spired the  administration.  These  payments  could  in  no  way 
involve  loss  to  the  government ;  the  cash  was  on  hand,  or 
could  be  easily  procured,  the  market  was  in  pressing  need 
of  the  money,  and  it  was  known  that  the  longer  the  panic 
endured  the  greater  would  be  the  permanent  injury  to  the 
business  of  the  country.  In  carrying  out  tliis  measure,  how- 
ever, there  are  two  particulars  in  which  the  actions  of  the 
administration  are  open  to  fair  criticism.  This  assistance 
of  the  government  would,  in  the  first  place,  have  been  much 
more  effective  had  it  not  been  so  long  delayed.  It  is  hardly 
just  to  censure  the  Secretary  for  not  possessing  the  gift  of 
prophesy,  and  foreseeing  that  Friday  was  to  be  the  black  day 
of  the  decade ;  but  a  people  has  the  right  to  claim  that  the 
man  intrusted  with  the  treasury  portfolio  shall  know  enough 
of  the  theory  of  trade  and  finance  to  enable  him  to  decide 
promptly  when  facts  are  made  known.  The  first  question, 
and,  indeed,  the  important  one,  to  be  decided  is,  whether 
the  administration  shall  under  any  circumstances  make  its 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      213 

appearance  upon  the  money  market  except  in  conformity  to 
fixed  rules ;  and  that  should  have  been  settled,  so  far  as  the 
Secretary  was  concerned,  before  he  ventured  to  fill  an  office 
bearing  such  grave  responsibilities.  Assuming  this  first  ques- 
tion to  have  been  answered  by  him  in  the  afiirmative,  the 
second  presents  itself  only  with  the  emergency,  and  asks  if 
a  crisis  is  so  great  as  to  warrant  interference  by  the  Federal 
government.  In  the  panic  of  1873  this  might  have  been 
answered  by  a  wise  man  early  on  Friday,  and  a  simple  notice 
that  the  Secretary  would  appear  on  the  market  and  pur- 
chase public  stocks  would  have  allayed  for  a  time  at  least  the 
unreasoning  fear  of  creditors. 

A  further  lesson  presents  itself  from  a  study  of  the  part 
performed  by  Secretary  Richardson  in  the  panic  of  1873. 
The  money  furnished  by  him  did  not  seem  to  grant  the 
relief  that  was  expected,  because  it  was  placed  upon  the 
market  in  such  a  manner  as  to  find  its  way  into  the  hands  of 
those  who  did  not  really  need  it.  We  may  with  propriety 
again  refer  to  the  rule  adopted  by  the  Bank  of  England  for 
placing  the  notes  issued  under  the  suspension  of  the  Bank 
Act.  The  attitude  of  the  bank  was  such  as  to  say  to  those 
who  rushed  like  madmen  about  the  streets  in  searcli  of  mon- 
ey :  Here  is  all  the  money  you  want  ready  at  hand,  but  you 
must  pay  for  it  a  high  fignre.  That  is  to  say,  it  placed  its 
discount  so  high  that  only  those  who  were  in  imperative  need 
of  the  money  would  consent  to  the  loss  which  would  attend 
the  realization  of  their  securities.  In  1847,  the  panic  is  said  to 
have  disappeared  in  ten  minutes  after  it  was  known  that  the 
Bank  Act  had  been  suspended,  but  since  the  discount  upon 
securities  was  placed  very  high,  the  bank  was  obliged  to  issue 
only  about  £400,000  of  notes.  In  1857  and  1866,  similar 
results  followed  the  same  act  on  the  part  of  the  government, 
but  in  these  cases  the  bank  was  prohibited  from  granting 
any  discounts  less  than  10  per  cent.  The  principle  here  in- 
volved is  quite  plain.  This  money  which  the  government 
provides  must  not  be  hoarded,  or  the  purpose  for  which  it  is 
provided  will  be  defeated. 


214  NATIONAL  DEFICIT  FINANCIERING. 

In  1873  tliis  rule  was  disregarded,  and  the  well-meant 
endeavor  on  the  part  of  Secretary  Richardson  was  in  large 
measure  rendered  abortive.  The  Secretary  purchased  bonds 
in  legal-tender  notes,  paying  for  them  their  par  value  in 
gold.  Gold  was  quoted  in  currency  at  111,  while  bonds 
ranged  about  115;  the  loss,  therefore,  to  one  who  secured 
legal  tender  upon  sale  of  such  securities  was  equivalent  to  a 
discount  of  about  3  per  cent,  and  this  rate  was  not  suffi- 
ciently high  to  prohibit  the  conversion  of  debt  into  Ifegal 
tender  for  purposes  of  hoarding.  The  fact  is  that  the 
greater  portion  of  this  money  found  its  way  into  the  reserve 
or  deposits  of  the  savings-banks,  but  as  the  savings-banks 
availed  themselves  of  that  clause  upon  which  their  business 
is  transacted  which  permits  them  to  refuse  payments  upon 
deposits  for  three  months  after  notice,  there  was  no  way  in 
which  this  money  could  be  brought  again  into  general  use. 
One  is  then  obliged  to  say  that  the  business  community  re- 
ceived but  little  advantage  from  the  assistance  which  the  Sec- 
retary endeavored  to  grant,  but  that  this  is  due  rather  to  inef- 
ficient management  than  to  the  fact  that  relief  lay  outside 
his  ability  as  head  of  the  Treasury  Department.  He  should 
have  earlier  declared  his  intention,  and  he  should  have 
driven  a  harder  bargain  with  his  customers.  Suppose  he  had 
offered  to  purchase  bonds  at  their  par  value,  estimating 
greenbacks  as  gold ;  it  is  not  probable  that  he  would  have 
found  many  to  accept  his  offer,  but  the  knowledge  that  the 
money  was  offered  and  could  be  obtained  when  needed 
would  have  allayed  all  fear.  It  is  from  such  criticisms  as 
these  that  the  rules  are  to  be  disclosed  according  to  which  a 
treasury  carrying  a  heavy  public  debt  should  be  managed  in 
time  of  panic. 

But  what  may  be  said  for  the  proposal  that  interest- 
bearing  bonds  should  be  converted  into  treasury  notes? 
Oddly  enough,  something  quite  analogous  to  this  came  up  in 
1873.  It  will  be  remembered  that  Secretary  McCuUoch  en- 
deavored to  contract  the  currency  by  withdrawing  green- 
backs from  circulation.     Such  notes  as  were  withdrawn  were 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      215 

not  destroyed,  but  kept  in  the  treasury,  and  when  the  policy 
of  contraction  was  arrested,  under  Secretary  Boutwell,  that 
brilliant  financier  conceived  the  idea  that  this  fund  consti- 
tuted a  treasury  reserve.  "What  it  was  a  reserve  to,  or  why  a 
reserve  was  needed,  no  one  ever  knew,  for  there  were  no 
obligations  created  against  the  greenbacks  thus  withdrawn. 
It  was  claimed  that  this  fund  could  be  re-issued  at  the  pleas- 
ure of  the  government,  and  in  1873  strong  pressure  was 
brought  to  bear  upon  the  administration  to  induce  it  to  ex- 
pend this  fund  in  the  purchase  of  government  secm-ities. 
To  this  the  President  would  not  consent,  for  he  conceived 
that  no  legal  authority  existed  for  such  a  procedure. 

In  discussing  a  proposition  of  this  sort,  we  must  first 
learn  why  the  notes  issued  are  accepted  by  creditors.  Is  it 
because  they  are  legal  tender  or  because  they  are  convertible 
into  gold  ?  It  is  believed  that  the  advisability  of  the  issue 
of  new  notes  in  time  of  panic  must  differ  according  as 
one  or  the  other  of  these  assumptions  is  found  to  be  realized ; 
and  the  reader  is  especially  requested  to  hold  in  mind  that 
if  notes  are  convertible  into  gold,  there  is  no  need  of  a  legal- 
tender  clause  in  their  issue.  In  the  monetary  condition  of 
the  United  States  previous  to  1879,  when  specie  payments 
were  resumed,  the  power  of  re-issuing  at  pleasure  a  large 
amount  of  irredeemable  notes  was  full  of  danger  to  commer- 
cial interests.  "Whatever  evils  are  inherent  in  arbitrary 
changes  in  the  amount  of  money  attaches  to  this  power,  for, 
since  the  notes  are  irredeemable,  they  do  not  possess  the  abil- 
ity of  self-retirement  after  the  exigency  has  passed  which 
called  for  their  issue.  It  is  true  that  the  government  might 
provide  for  their  reconversion  into  interest-bearing  bonds, 
but  it  has  been  shown  by  experience  that  this  is  not  a  sufla- 
cient  guarantee  against  inflation.  "We  are,  therefore,  con- 
strained to  conclude  that  the  President  was  wise  in  opposing 
the  employment  of  the  "  reserve  fund  "  for  the  purchase  of 
bonds.  And  yet  the  argument  in  favor  of  such  a  measure, 
although  not  conclusive,  is  very  strong.  Unless  it  is  known 
that  the  ability  of  the  government  to  grant  assistance  in 


216  NATIONAL  DEFICIT  FINANCIERING. 

times  of  pressure  is  without  limit,  all  its  proffered  help  may 
be  futile.  The  reason  why  a  suspension  of  the  English  Bank 
Act  is  able  immediately  to  restore  confidence  is  that  every 
solvent  house  knows  that  the  bank's  funds  are  unlimited, 
and  that  every  business  man  with  good  securities  is  safe. 
But  if  the  assistance  of  the  government  can  not  extend  be- 
yond the  surplus  it  happens  to  have  on  hand,  there  is  no 
assurance  that  its  strength  is  adequate  to  the  task  it  under- 
takes. "  Under  the  present  system  of  Commercial  Credit," 
says  the  economist  Mr.  MacLeod,  "  there  must  be  some 
Source  with  the  Power  of  issuing  undoubted  Credit  to  sup- 
port Solvent  Commercial  Houses  in  times  of  Monetary 
Panic,"  and  he  prints  it  in  italics.  Without  the  power  of 
issuing  notes  at  discretion,  the  government  can  not  furnish 
this  undoubted  credit ;  with  the  power  to  issue  irredeemable 
notes,  all  business  is  thrown  on  that  uncertain  basis  which 
arises  from  money  not  self-regulating  but  Congress-regu- 
lated. Certainly  the  position  of  a  financier  under  such  con- 
ditions is  far  from  agreeable.  His  decision  must  in  either 
case  be  followed  by  serious  consequences.  But,  all  things 
considered,  it  seems  wiser  to  permit  a  panic  to  wear  itself 
out  rather  than  grant  to  any  administration  the  power  of  in- 
flating the  currency  at  pleasure. 

But  at  present  United  States  notes  are  redeemable  in 
specie.  Let  it  be  assumed  that  gold  is  the  only  paying 
metal  (or  that  other  nations  have  also  adopted  silver  as  part 
of  their  monetary  system),  the  money  of  this  country  would 
then  be  self-regulating,  and  continue  to  be  self -regulating 
as  long  as  specie  payments  were  maintained.  The  Fed- 
eral government  would,  under  such  conditions,  have  as  full 
and  complete  control  over  a  panic,  by  an  offer  to  convert 
bonds  into  notes  at  the  pleasure  of  the  holder,  as  has  the 
government  of  England  when,  acting  through  the  bank,  it 
offers  to  discount  commercial  paper  with  new  notes.  And  it 
would  be  wise  for  Congress  to  provide  a  law  granting  to 
the  administration  such  discretion  in  the  peace  management 
9f  the  public  debt  that,  while  the  debt  shall  continue,  it  may 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      217 

serve  as  ballast  for  commercial  enterprises.  Suppose  that 
notes  were  issued  in  consequence  of  such  a  law,  they  could 
not  effect  inflation,  for  the  amount  issued  would  be  quickly 
withdrawn,  being  reconvertible  into  bonds,  and  convertible 
into  specie ;  but  if  the  financial  history  of  England  is  worth 
anything  as  evidence  of  what  would  take  place,  the  practical 
effect  of  the  law  would  be  secured  without  an  issue  of  notes. 

Conversion  of  Puhlic  Debts. 

In  continuing  the  line  of  this  discussion  as  proposed,  our 
attention  is  now  drawn  to  the  topic  of  conversion  of  public 
debts.  The  process  of  conversion  may  be  technically  de- 
fined as  a  financial  operation  addressed  to  the  form  of  a  pub- 
lic debt  already  in  existence.  Since  contracts  of  this  sort 
are  expressed  in  terms  of  principal,  rate  of  interest,  and 
time,  a  change  in  any  of  these  items  may  be  properly  re- 
garded as  constituting  a  conversion ;  but  for  the  most  part 
the  study  that  follows  will  be  confined  to  changes  in  the  rate 
of  interest. 

The  immediate  effect  of  an  operation  that  reduces  the 
rate  of  interest  upon  public  bonds  is  to  decrease  the  burden 
of  a  debt.  The  money  thus  saved  may  be  remitted  to  the 
people  by  reduction  of  taxes,  or  it  may  be  devoted  to  the  ex- 
tinction of  the  principal  of  the  debt. 

But  under  what  conditions  will  it  be  possible  to  induce 
creditors  to  submit  to  decreased  interest  ?  It  is,  of  course, 
not  contemplated  that  a  state  shall  employ  its  sovereign 
power  to  enforce  modifications  of  the  contracts  into  which  it 
has  freely  entered.  Such  a  procedure  would  be  repudiation, 
and  not  voluntary  conversion.  It  is  assumed  throughout  this 
discussion  that  the  state  acknowledges  in  the  spirit  of  honor 
and  integrity  the  terms  of  the  obligations  it  has  created 
against  itself. 

A  government  is  in  a  position  to  secure  a  reduction  in  the 
rate  of  interest  which  it  pays  when  it  holds  the  legal  right 
to  expunge  the  debt  through  payment  of  the  principal,  and 
when  the  ruling  rate  for  money  upon   the  market  is  less 


218  NATIONAL  DEFICIT  FINANCIERING. 

than  the  rate  mentioned  in  the  bond.  These  two  condi- 
tions fulfilled,  a  government  may  say  to  its  creditors :  You 
must  either  consent  to  receive  less  for  the  capital  you  have 
intrusted  to  us,  or  the  amount  of  capital  called  for  in  the 
bond  will  be  returned  to  you  and  the  debt  discharged. 

It  seems  almost  unnecessary  to  arrest  our  study  at  this 
point  for  the  purpose  of  showing  that  a  government  is  justi- 
fied in  thus  reducing  the  burden  of  a  debt.  An  operation 
of  this  sort  appears  altogether  appropriate,  at  least  to  the 
people  of  the  United  States.  In  this  country,  as  well  as  in 
England,  a  fall  in  the  market  rate  of  interest  below  the 
treasury  rate  imposes  a  duty  upon  the  government  to  secure 
to  the  taxpayer  the  benefits  rendered  possible  by  such  a  state 
of  affairs.  Yet,  strange  as  it  may  seem,  there  have  been 
cases  in  which  the  influence  of  debt-holders  has  been  suc- 
cessfully urged  against  any  reduction  in  interest.  This  oc- 
curred in  France  between  1878  ai^d  1883.  At  any  time  dur- 
ing these  years  the  condition  of  the  money  mai-ket  was  such 
that  large  savings  might  have  been  easily  effected  by  reduc- 
ing the  rate  of  interest  paid  upon  the  public  debt,  yet  no 
ministry  dared  undertake  the  measure  for  fear  of  political 
consequences  at  current  elections. 

"  The  state  had  borrowed  in  a  moment  of  distress,"  says 
M.  Mathieu-Bodet,  "  at  the  rate  of  6*06  and  6-29  per  cent ;  it 
is  now  able  to  secure  so  much  capital  as  is  necessary  to  repay 
this  debt  at  less  than  3-75  per  cent."  The  possible  saving  aris- 
ing from  this  relation  of  market  rate  to  the  rate  paid  on  the 
bonds  was  recognized  by  economists,  financiers,  men  of  af- 
fairs, and  men  of  the  state.  In  1879  the  chambers  appointed 
a  commission  empowered  to  carry  through  a  plan  of  conver- 
sion. The  minister  of  finance  came  before  the  commission  and 
declared  "  that  it  was  impossible."  The  secret  of  this  extra- 
ordinary procedure  was  that  Gambetta,  at  that  time  practical 
dictator  in  France,  feared  the  effect  of  such  a  measure  on  his 
own  and  his  party's  power.  An  historian  of  the  finances  of 
the  Eepublic  adds  in  relation  to  this  matter  :  "  In  1880  and 
1881,  as  in  1879,  the  circumstances  were  propitious';  rates  were 


PEACE  MANAGEMENT  OF   A  PUBLIC  DEBT.  219 

favorable.were  for  conversion ;  money  was  easy ;  no  crisis  had 
yet  borne  upon  exchange.  In  1880,  the  successor  of  M.  Say, 
M.  Magnin,  was  in  a  position  to  repair  the  error  of  1879 ;  but 
the  interdict  was  not  yet  raised,  and  M.  Gambetta  conserved 
his  power.  For  the  rest,  the  approach  of  the  elections  led 
the  minister,  the  commission,  and  the  Chamber,  little  by  lit- 
tle, to  the  views  of  the  dictator ;  the  deputies  commenced  to 
think  that  the  holders  of  the  bonds  would  be  little  satisfied 
with  the  reduction  of  their  payments,  and  that  the  tax-pay- 
ers had  little  taste  for  the  economy ;  they  feared  the  hostil- 
ity of  the  one  class  without  counting  very  much  on  the  favor 
of  the  other."  ^ 

I  have  called  this  an  extraordinary  procedure.  It  cer- 
tainly appears  so.  It  indicates  that  the  French  people  do  not 
possess  the  financial  sense  in  a  high  degree,  otherwise  they 
could  never  be  deceived  by  the  sophistry  that  it  is  a  good 
thing  to  pay  taxes  in  order  to  secure  payment  on  bonds. 
This  is  altogether  akin  to  the  old  error  that  a  public  debt 
can  not  impoverish  a  nation,  because  the  payments  it  occasions 
are  but  payments  from  the  right  hand  to  the  left.  Even 
supposing  the  debt  to  be  distributed  among  the  people  in 
proportion  to  the  demands  made  upon  them  for  contribu- 
tions, there  would  yet  be  an  actual  loss  in  shrinkage  while 
the  taxes  are  passing  through  the  hands  of  the  government. 
Indeed,  the  considerations  whicli  lead  to  the  conclusion  that 
public  justice  demands  conversion,  when  admitted  by  the 
terms  of  the  contract,  are  so  self-evident  that  their  statement 
appears  puerile ;  and  the  fact  that  French  writers  on  finance 
regard  the  careful  presentation  of  such  considerations  neces- 
sary forms  one  of  the  most  severe  criticisms  upon  the  finan- 
cial ability  of  that  people. 

But  does  the  conversion  of  a  public  debt  meet  with  the 
approval  of  public  economy,  as  well  as  conform  to  the  de- 
mands of  fair  dealings?  Certain  curious  arguments  have 
arisen  respecting  the  question  thus  introduced.     It  is  some- 

'  Cf .  "  Lea  Finances  de  la  R^publique,"  H.  Le  Tresor  de  la  Rocque.  Paris, 
1884,  pp.  24-29. 


220  NATIONAL  DEFICIT  FINANCIERING. 

times  urged  that  a  reduction  in  the  rate  of  interest  paid  by 
the  state  is  opposed  to  public  welfare,  because  this  tends  to 
force  the  rate  of  profit  in  the  community  down,  and  this  is 
conceived  to  be  prejudicial  to  industrial  prosperity.  On  the 
other  hand,  they  who  propose  a  forced  conversion  of  public 
debt,  reducing  the  government  rate  below  the  market  rate, 
rely  upon  the  same  premise  for  their  conclusion.  Low  prof- 
its, they  claim,  follow  conversion ;  this  leads  to  low  prices, 
and  low  prices  are  desirable  for  the  community.  It  is  ita- 
necessary  to  pass  judgment  between  these  conflicting  claims, 
for  the  truth  is  that  the  premise  upon  which  they  both  rest 
is  wholly  untenable.  It  is  not  within  the  ability  of  a  gov- 
ernment to  permanently  affect  the  rate  of  profit  in  a  com- 
munity by  changing  the  rate  paid  upon  its  debt.  The  rate 
of  profit  is  determined  by  general  industrial  conditions.  One 
must  not  assume  to  understand  this  subject  until  he  perceives 
that  a  conversion  of  a  public  debt,  by  which  interest  pay- 
ments are  reduced,  is  a  resultant  and  not  a  causal  fact.  It 
is  of  no  importance,  therefore,  whether  the  claim  here  stated 
be  urged  for  or  against  conversion,  it  is  equally  untenable  in 
either  case. 

Such  considerations  as  these  suggest  in  what  manner 
the  public  financier  should  approach  the  study  of  refunding 
operations.  He  should  conceive  that  the  administration 
stands  with  regard  to  them  as  the  directing  board  of  a  great 
business  corporation.  This  is  time,  because  in  this  matter 
there  can  be  no  disparity  of  interests  between  the  govern- 
ment as  a  corporation  and  the  subjects  of  the  government  as 
tax-payers.  Questions  of  refunding,  therefore,  are  much 
more  simple  than  they  at  first  appear,  for  they  come  under 
the  general  rules  of  common  business. 

It  may  be  a  trite  saying,  and  yet  it  is  an  important  truth, 
that  the  first  step  toward  conversion  is  the  establishment  of 
public  credit.  So  far  as  a  government  is  concerned,  a  reduc- 
tion in  the  rate  of  interest  paid  on  public  obligations  is  the 
only  means  through  which  it  may  avail  itself  of  the  benefits 
that  spring  from  a  rise  in  its  own  credit.     Thus,  if  the  ne- 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      221 

cessarj  taxes  are  levied,  if  obligations  are  reduced  to  clear 
and  simple  form,  if  demand  for  variety  be  duly  appreciated, 
and  if  all  question  of  fair  dealing  are  placed  beyond  reason- 
able doubt,  confidence  will  be  firmly  established  in  the  ability 
and  willingness  of  a  government  to  meet  its  contracts,  and 
its  bonds  will  consequently  be  eagerly  sought  by  all  investors. 
The  market  being  in  this  manner  extended,  competition  will 
arise  among  the  purchasers,  and  stocks  will  be  quoted  at 
premium,  although  the  government  has  reserved  the  right 
to  redeem  them  at  par.  It  is  under  such  conditions  that  the 
burden  of  a  debt  may  be  reduced,  and  the  reduction  is  prop- 
erly accredited  to  the  administration  as  a  reward  for  public 
honesty  and  sound  financial  management.  Financial  writers 
have  always  been  willing  to  grant  due  praise  to  those  states- 
men who  have  brought  about  a  decrease  of  interest  charges, 
for  they  fully  recognize  that  the  honor  of  such  a  transaction 
belongs  to  those  who  have  sedulously  guarded  and  persistently 
supported  the  public  credit.  A  quotation  from  Sir  Stafford 
ISTorthcote,  descriptive  of  a  refunding  operation  in  England 
in  184i,  may  not  be  inappropriate  as  illustrating  this  point : 

Mr.  Goulburn  brought  forward  his  plan  for  this  conversion 
on  the  8th  of  March,  1844.  •  It  was  not  the  first  occasion  upon 
which  he  had  had  to  perform  such  a  task  ;  for  it  had  fallen  to 
his  lot,  in  1830,  to  propose  and  carry  a  reduction  of  interest 
upon  a  large  part  of  the  very  stock  with  which  he  was  now 
again  to  deal ;  and  it  was  natural  that  he  should  feel  gratifica- 
tion at  being  a  second  time  able  to  propose  so  material  a  relief 
to  the  country.  He  was  able,  too,  to  claim  for  the  Government 
of  which  he  was  a  member  a  considerable  share  of  credit  for 
the  policy  which  had  contributed  to  bring  about  the  satisfac- 
tory state  of  the  money  market  which  rendered  his  operation 
possible.  How  far  the  revival  of  trade  and  the  industry  of  the 
country  was  to  be  attributed  to  their  measures  was,  of  course, 
a  matter  open  to  question  ;  but  it  was  evident  that  their  firm 
determination  to  avoid  a  recurrence  to  any  system  of  loans  for 
the  pui'pose  of  meeting  the  deficiencies  of  the  revenue,  and  to 
supply  those  deficiencies  by  fresh  taxation,  and  their  success 
in  strengthening  the  balances  in  the  Exchequer,  and  disj^ensing 
with  the  necessity  of  leaning  on  the  Bank  for  support,  had  di- 
rectly tended  to  raise  the  price  of  the  funds.  At  the  accession 
of  the  Government  to  power,  Consols  had  stood  at  89  ;  they 


222  NATIONAL  DEFICIT  FINANCIERING. 

now  stood  at  99.  The  balances  in  the  Exchequer,  which  at  the 
commencement  of  the  year  had  been  as  low  as  £1,400,000,  had 
risen  to  £4,700,000,  There  were  no  Deficiency-bills  iinpaiil, 
nor  had  it  been  necessary  to  have  recourse  to  the  Bank  for  ad- 
vances in  anticipation  of  supplies  during  the  whole  year.  The 
amount  of  Exchequer-bills  in  circulation  was  betAveen  £18,000,- 
000  and  £19,000,000  only,  an  amount  then  considered  low  in 
comparison  with  previous  years  ;  the  interest  upon  them  was 
but  £2  4s.  per  cent,  and  they  commanded  a  premium  of  £3 
ISs.  per  cent  in  the  market.  There  could  be  no  doubt  that  the 
firmness  of  the  Government  and  of  Parliament  in  submitting 
to  the  Income  Tax,  rather  than  stave  off  the  evil  of  a  growing 
deficiency  by  resorting  to  a  loan,  had  contributed  materially 
to  this  satisfactory  state  of  things  ;  and  the  country  was  now 
to  reap  the  just  reward  of  its  exertions  for  the  maintenance  of 
its  public  credit,  in  the  reduction  of  the  rate  of  interest  to  the 
public  creditor. ' 

We  are  led  next  to  consider  certain  technical  questions 
that  arise  in  carrying  through  a  policy  of  conversion.  With 
regard  to  the  time  at  which  this  policy  may  be  set  on  foot, 
the  ground  for  decision  is  altogether  plain,  but  the  details  of 
conversion  are  by  no  means  so  simple.  Contrary  to  the 
definition  given  above,  a  refunding  law  usually  assumes  that 
an  old  debt  is  to  be  extinguished  and  a  new  one  created.  It 
is  not  admitted  that  the  new  bonds  represent  the  old  with 
changed  stipulations.  If,  for  example,  we  turn  to  the  act  of 
1870,  which  authorized  the  refunding  of  the  national  debt 
of  the  United  States,  it  will  be  noticed  that  the  first  section 
of  this  law  proceeds  as  though  a  debt  were  to  be  created. 
The  Secretary  of  the  Treasury  is  authorized  to  issue  bonds  of 
three  sorts,  each  to  a  limited  amount,  the  time  of  redemption 
being  carefully  stated.  There  is  no  reference  to  the  existing 
debt,  except  in  the  last  clause,  which  specifies  that  "  nothing 
in  this  act,  or  in  any  other  law  now  in  force,  shall  be  con- 
strued to  authorize  any  increase  whatever  of  the  bonded  debt 
of  the  United  States,"  The  wording  of  the  second  section, 
also,  maintains  the  assumption  that  the  debt  created  is  a  new 
debt.     By  it  the  Secretary  of  the  Treasury  is  empowered  to 

*  "  Twenty  Years  of  Financial  Policy,"  by  Sir  StafiFord  H.  Northcote,  Bart., 
pp.  54-56. 


PEACE  MAXAGEMEXT  OF  A  PUBLIC  DEBT.      223 

sell  the  bonds  issued  under  the  axjt  at  their  par  value  in  coin, 
the  proceeds  of  which  shall  be  devoted  to  the  redemption  of 
the  outstanding  "  five-twenty  bonds,"  or  to  accept  in  lieu  of 
coin  the  old  debt  at  par.  That  is,  subscriptions  to  the  new 
debt  may  be  made  either  in  money  or  in  old  stock. 

Should  one  inquire  why  governments  proceed  upon  the 
assumption  of  creating  a  new  debt  in  fashioning  their  refund- 
ing laws,  two  replies  present  themselves.  In  the  first  place,  this 
is  the  most  simple  method  of  procedure.  The  public  book- 
teeping  is  in  this  manner  guarded  against  complications  of 
any  sort.  One  account  is  expunged  before  another  is  begun. 
But  of  more  importance  than  this,  the  government,  by  adopt- 
ing this  method,  avoids  every  appearance  of  exercising  undue 
pressure  upon  its  creditors.  One  condition  of  the  old  debt 
is  that  a  stipulated  annuity  will  be  paid  as  long  as  the  prin- 
cipal remains  unpaid  ;  in  order,  then,  to  reduce  the  annuity, 
the  technicality  of  law  requires  the  creation  of  a  new  princi- 
pal. In  this  manner  any  creditor  who  is  not  satisfied  with 
the  rate  of  interest  on  the  new  bonds  may  receive  his  capital 
in  disposable  form.  The  practical  bearing  of  this  view  of  a 
refunding  operation  is,  that  the  offer  of  payment  should  be 
made  in  good  faith  by  the  government,  and  under  such  con- 
ditions that  the  demand  of  any  creditor  who  desires  cash 
instead  of  new  bonds  may  be  promptly  met. 

It  is  not,  however,  necessary,  in  order  that  the  offer  of  a 
government  be  sincere,  that  a  sum  of  money  should  be  col- 
lected adequate  to  the  payment  of  the  entire  debt.  It  is 
only  required  that  public  credit  should  be  so  firm,  and  the 
money  market  be  in  such  a  condition,  that  the  administration 
is  morally  certain  of  its  ability  to  borrow  fresh  capital  at  the 
rates  for  which  it  offei-s  its  new  bonds. 

Again,  in  order  that  a  refunding  operation  may  be  suc- 
cessfully carried  through,  the  new  bonds  should  grant  some 
immediate  actual  benefit  to  those  who  are  willing  to  accept 
them  in  lieu  of  the  old ;  for  in  this  manner  the  transaction 
will  not  call  for  the  handling  of  any  considerable  amount  of 
money.     There  can,  of  course,  be  no  advantage  in  the  condi- 


224:  NATIONAL  DEFICIT  FINANCIERING. 

tions  offered  by  the  new  debt  over  those  granted  by  the  old, 
but  the  contract  on  the  new  debt  may  be  so  drawn  as  to  in- 
vite purchases  when  capitalists  compare  this  method  of  in- 
vesting their  money,  with  investment  in  other  forms  of  pro- 
ductive property.  This  does  not  mean  that  governments 
must  pay  a  higher  rate  of  interest  than  other  investments 
can  pay.  The  several  terms  of  a  debt  are,  within  limits, 
transmutable.  As  motion  may  be  changed  into  heat  and 
heat  into  light,  so  security  may  be  transmuted  into  lengtH  of 
investment  and  length  of  investment  into  rate  of  interest. 
This  being  true,  it  follows  that  the  financier  can  depress  any 
particular  element  of  a  bond  by  emphasizing  the  other  terms 
of  the  contract ;  and  this  he  should  do  in  favor  of  a  low  rate  of 
interest,  for  it  is  the  annual  interest-payments  which  consti- 
tute the  immediate  burden  of  a  public  debt.  But  because 
of  the  many  ways  in  which  public  obligations  may  be  used 
in  private  affairs,  they  who  lend  the  money  regard  time  for 
which  investments  are  made  and  stability  of  value  as  of 
greater  relative  importance.  It  seems,  then,  possible  for  the 
financier  to  depress  the  rate  of  interest  to  a  low  figure  while 
yet  offering  investors  some  decided  commercial  advantage 
over  other  forms  of  investment,  and  this  he  can  do  by  stipu- 
lating that  the  new  bonds  shall  be  subject  to  no  further 
alteration  for  a  specified  term  of  years.  Without  this  guar- 
antee a  bond  bearing  a  low  rate  of  interest  will  not  flo:it  at 
par. 

But  what  is  the  proper  time  for  a  guarantee  to  run  ?  No 
definite  answer  to  this  question  can  be  given  except  in  the 
presence  of  known  conditions,  but  we  may  consider  the 
principle  according  to  which  it  should  be  determined.  This 
decision  of  the  financier  depends  wholly  upon  the  policy 
that  has  been  adopted  respecting  the  payment  of  the  debt. 
Upon  the  theory  of  permanent  indebtedness,  the  considera- 
tion of  a  low  rate  of  interest  ought  to  outweigh  that  of  con- 
trol over  the  form  of  the  debt,  and  the  time  of  guarantee 
should  then  be  based  upon  an  estimate  of  the  probable  future 
fall  in  the  market  value  of  money.     That  is  to  say,  no  gov- 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      225 

eminent  should  contract  itself  out  of  the  right  to  make  a 
further  conversion  at  some  future  time  in  order  to  secure  a 
slight  immediate  reduction  in  the  interest-payments.  If  the 
commercial  forces  are  such  as  to  depress  rapidly  the  rate  of 
interest,  and  if  it  is  probable  they  will  continue  to  operate, 
the  guarantee  against  new  conversion  should  not  be  for  a 
long  period ;  but  if,  on  the  other  hand,  the  market  rate  for 
money  is  already  as  low  as  may  be  reasonably  expected  for 
some  years,  the  time  may  be  more  extended.  The  rule  that 
applies  to  old  countries  can  not  be  accepted  by  new  and  rap- 
idly developing  peoples. 

Assuming,  however,  the  policy  of  debt  payment,  another 
element  bearing  on  this  question  is  introduced  into  the  cal- 
culations of  the  financier ;  but  in  this  case  the  rule  is  quite 
simple.  The  administration  should  assent  to  no  plan  of  con- 
version by  which  the  policy  of  debt  payment  may  be  em- 
barrassed. This  rule  has  been  frequently  disregarded.  In 
the  financial  history  of  our  own  country  there  have  been  two 
instances  in  which  the  Secretary  of  the  Treasury  has  found 
it  impossible  to  apply  in  a  judicious  manner  the  moneys  ap- 
propriated for  the  extinction  of  the  debt.  The  first  of  these 
was  the  occasion  of  much  complaint  by  Mr.  Gallatin  between 
1806  and  1811.  As  has  been  already  stated,  the  financial 
operations  of  the  Federalists  had  thrown  a  large  part  of  the 
debt  into  a  form  which  permitted  payment  only  at  the  rate 
of  a  twenty-four-year  annuity.  But,  as  Mi\  Gallatin  had  se- 
cured an  annual  appropriation  of  $8,000,000  for  the  service 
of  the  debt,  all  obKgations  payable  at  the  pleasure  of  the  gov- 
ernment, except  the  three  per  cents,  were  quickly  expunged, 
and  the  Secretary  consequently  found  it  impossible  to  apply 
in  a  judicious  manner  the  surplus  which  he  had  with  so  much 
labor  secured.  Had  Mr.  Gallatin  managed  the  refunding  of 
the  original  debt,  or  had  Mr.  Hamilton  managed  the  payment 
of  the  refunded  debt,  this  embarrassment  would  not  have 
made  its  appearance ;  but  this  incident  well  illustrates  the 
antagonism  that  exists  between  the  policies  of  conversion  and 
payment.     The  other  case  is  of  slight  importance.     It  oc- 


226  NATIONAL  DEFICIT  FINANCIERING. 

curred  in  1829.  The  debt  available  for  payment  amounted 
to  $9,800,000,  and  the  surplus  revenue  for  the  year  waa 
$12,000,000. 

But  the  refunding  act  of  1870  is  open  to  just  criticism 
from  this  point  of  view.  Up  to  the  present  time  there  has 
been  no  difficulty  in  applying  surplus  revenue  to  existing 
obligations,  but  the  present  guarantees  against  redemption 
are  such  that  the  government  must  soon  experience  the  em- 
barrassment of  endeavoring  to  carry  on  the  policy  of  ^ebt 
payment.  Besides  the  five-per-cents,  two  classes  of  bonds  were 
created — those  bearing  4^  per  cent  interest,  redeemable  Sep- 
tember 1,  1891 ;  and  those  bearing  -4  per  cent  interest,  re- 
deemable July  1,  1907.  The  amount  of  the  former  is 
$250,000,000 ;  that  of  the  latter  is  $738,000,000.  In  addi- 
tion to  these,  there  are  the  three-per-cent  bonds  redeem- 
able at  the  pleasure  of  the  Government,  now  amounting  to 
$194,000,000.  The  permanent  appropriation  due  the  sink- 
ing-fund is  about  $45,000,000,  but  for  our  present  calculation 
should  be  put  at  $50,000,000.  Assuming  that  this  appro- 
priation will  be  applied  to  the  redemption  of  the  three-per- 
cent bonds,  it  appears  that  there  are  enough  of  these  bonds 
to  absorb  the  sinking-fund  payments  for  four  years,  which 
would  bring  us  on,  in  the  policy  of  debt  payment,  to  the 
year  1890.  At  first  glance  it  appears  that  the  calculation  of 
our  financiers  was  quite  accurate,  for  but  one  year  intervenes 
between  the  expungement  of  the  three-per-cent  bonds  and 
the  time  when  the  four  and  a  half  per  cents  become  redeem- 
able at  par.^  But  this  conclusion  overlooks  the  fact  that  sur- 
plus revenue  can  not  be  added  to  the  sinking-fund  payments, 
as  has  heretofore  been  the  custom. 

But,  passing  to  the  year  1891,  how  will  matters  then 

^  The  figures  are  changing  so  rapidly  that  a  correction  in  the  text  does  not 
seem  to  be  the  most  pertinent  method  of  portraying  the  full  strength  of  this 
argument.  As  this  goes  to  press,  the  monthly  statement  for  December,  1886, 
shows  that  $78,000,000  only  of  the  three  per  cents  remain  unpaid,  and  the  Presi- 
dent in  his  message  assumes  that  the  entire  amount  will  be  paid  during  the  com- 
ing year.  Yet  the  calculation  in  the  text  is  based  upon  figures  which  were  cor- 
rect a  year  ago. 


PEACE  MAJ^AGEMENT  OP  A  PUBLIC  DEBT.  227 

stand  ?  In  that  year  a  sum  of  debt  capable  of  absorbing  the 
sinking-fund  appropriations  for  live  years  will  come  under 
the  control  of  the  government.  But  no  other  bonds  are 
redeemable  until  1907.  It  seems,  then,  that  in  1896  the  ad- 
ministration must  adopt  some  other  method  of  paying  the 
debt  or  suspend  for  a  term  of  years  the  sinking-fund  appro- 
priation. To  adopt  this  second  suggestion  would  be,  for  all 
practical  purposes,  to  decide  upon  the  maintenance  of  a  debt 
of  three  quarters  of  a  billion,  for  taxes  once  remitted  are 
with  difficulty  re-imposed  for  the  pui-pose  of  paying  a  debt. 
Still,  it  can  not  be  said  that  this  is  a  serious  criticism  upon 
the  refunding  act  of  1870  ;  the  greater  blame  lies  with  those 
who  now  profess  to  manage  the  financial  affairs  of  the  coun- 
try. 

Perhaps  there  is  no  temptation  presented  to  the  financier 
so  alluring  as  that  which  leads  him  to  sacrifice  control  over 
a  debt  for  a  slight  though  an  immediate  reduction  in  the 
annual  payment  for  interest.  Suppose,  for  example,  that 
money  is  worth  4  per  cent,  but  that  the  government  is  pay- 
ing 5  per  cent  upon  outstanding  bonds.  It  is  certain  that, 
with  a  ten  years'  guarantee,  the  debt  of  the  country  may 
be  converted  into  a  four-per-cent  bond  issued  at  par,  thus 
permitting  a  saving  of  one  fifth  of  the  previous  annuity. 
But  the  financier  is  not  satisfied  with  this.  lie  sees  that,  by 
granting  a  guarantee  against  new  conversion  for  twenty  or 
thirty  years,  he  can  yet  further  reduce  the  immediate  bm-den 
of  the  debt,  and  the  greater  the  reduction  the  greater  will 
be  his  popular  reputation.  Few  men  can  withstand  such  a 
temptation,  but  it  is  against  this  choice  that  sound  financial 
principles  utter  their  strongest  protest.  It  is  altogether  prob- 
able that,  before  the  thirty  years  shall  have  expired,  a  lower 
rate  of  interest  than  the  actual  rate  paid  might  be  secured, 
in  which  case  what  is  gained  at  the  beginning  of  the  period 
is  lost  at  its  close.  The  present  quotations  for  the  four-per- 
cent bonds  show  that,  were  they  now  under  the  control  of 
the  government,  they  might  be  reconverted  into  bonds  bear- 
ing 3  per  cent  interest.     There  is  thus  disclosed  an  unneces- 


228  NATIONAL  DEFICIT  FINANCIERING. 

saiy  annual  payment  of  one  per  cent  upon  three  quarters  of  a 
billion  of  money,  resulting  from  an  error  in  judgment  on 
the  part  of  Congress  in  1870,  and  this  payment  must  con- 
tinue  till  1907. 

Other  questions  of  a  technical  character  arise  in  the  course 
of  refunding  a  public  debt.  Thus,  it  is  necessary  to  decide 
whether  the  operation  shall  be  carried  on  so  as  to  decrease 
the  principal  of  the  debt,  so  as  to  increase  the  principal,  or 
in  such  a  manner  that  the  principal  of  the  new  debt  shall  be 
the  same  as  that  of  the  old.  In  the  first  case,  conversion  is 
said  to  have  taken  place  at  premium ;  in  the  second,  at  dis- 
count ;  in  the  third,  at  par. 

Conversion  at  premium  is  never  adopted  with  a  view  to 
lighten  the  immediate  burden  of  a  debt,  but  rather  as  one 
of  the  means  of  extinguishing  its  principal ;  its  consideration, 
therefore,  finds  no  place  in  our  present  discussion.  And,  so 
far  as  the  other  plans  of  conversion  are  concerned,  it  is  only 
necessary  to  clearly  understand  what  is  meant  by  the  terms, 
and  it  will  at  once  be  seen  that  the  principles  which  control 
the  first  issue  of  a  debt  apply  in  every  particular.  A  dis- 
count conversion  is  a  discount  sale  of  a  new  debt,  the  pro- 
ceeds of  which  are  applied  to  the  extinction  of  a  debt  at 
premium  or  par.  In  order  to  carry  such  an  operation 
through,  there  must  be  created  a  sufficient  amount  of  addi- 
tional stock  that  the  total  principal  of  the  new  debt,  at  the 
rate  for  which  it  sells  upon  the  market,  will  equal  the  par 
value  of  the  old  debt.  It  need  hardly  be  remarked  that  the 
rate  of  interest  borne  by  the  new  debt  will  be  less  than  the 
rate  which  an  equal  amount  of  free  capital  would  have  se- 
cured had  the  conversion  taken  place  at  par,  and  that  it  is  this 
slight  saving  in  the  actual  amount  paid  in  interest  that  rec- 
ommends discount  conversions  to  the  practical  financier. 
But,  for  the  reasons  already  given,  this  policy  does  not  meet 
the  claims  of  sound  financiering.^     The  immediate  saving 

'  Cf.  ante,  pp.  167-17Y. 

It  is  also  necessary  for  the  financier  to  avoid  the  entanglements  of  lotteries, 
prizes,  and  tontines  as  part  of  a  system  of  conversion.    Not  only  is  their  use 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT,      £29 

thus  secured  will  be  likely  to  entail  a  relatively  greater  loss 
in  the  long  run. 

The  refunding  operations  of  the  United  States  have,  for 
the  most  part,  taken  place  on  the  basis  of  bonds  sold  at  par. 
The  refunding  law  of  1870  gave  large  discretionary  powers 
to  the  Secretary,  but  in  this  particular  was  strict  and  expli- 
cit. It  forbade  any  increase  of  existing  indebtedness.  Eng- 
land also,  of  late  years,  has  adopted  this  principle.  Referring 
to  the  last  great  operation  upon  the  English  debt,  one  learns 
that  the  relative  merits  of  the  two  plans  were  discussed,  but 
that  conversion  at  par  was  given  precedence  over  conversion 
at  discount.  Sir  Stafford  Northcote  relates  the  argument  of 
the  Chancellor  of  the  Exchequer  as  follows  : 

Various  plans,  said  Mr.  Goulburn,  had  at  different  times  been 
adopted  for  the  reduction  of  interest  upon  portions  of  our  debt. 
Sometimes  an  addition  had  been  made  to  the  nominal  capital 
of  the  debt,  in  order  to  induce  the  creditor  to  accept  a  reduced 
amount  of  annuity  ;  sometimes  the  interest  had  been  augmented 
for  a  limited  period,  in  order  that  it  might  be  reduced  after- 
ward.    In  the  present  instance  it  was  possible  to  reduce  the 

evidence  that  credit  is  weak,  but,  in  thia  country  at  least,  they  tend  to  sink 
credit  yet  lower/  As  a  matter  of  curiosity,  the  following  plan  of  refunding  by 
lottery,  adopted  in  Louisiana,  is  subjoined : 

By  an  act  of  March  6,  1876,  a  "premium  bond  plan"  was  established  to 
refund  the  debt  of  the  city  of  New  Orleans.  "  The  plan  proposed  was  an  ex- 
change of  outstanding  bonds  for  premium  bonds ;  the  latter  to  be  of  the  de- 
nomination of  §20  each,  bearing  5  per  cent  interest  from  September  1,  1875, 
payable  at  no  designated  period,  the  interest  and  principal  to  be  paid  at  the 
same  time,  and  not  separately,  and  the  maturity  of  the  bonds — principal  and 
interest — to  be  determined  by  chance  in  the  drawing  of  a  lottery.  One  million 
of  these  bonds  is  to  be  divided  into  ten  thousand  series  of  one  hundred  bonds 
each.  The  ten  thousand  series  are  to  be  placed  in  a  wheel,  and,  in  April  and 
October  of  each  year,  as  many  series  are  to  be  drawn  as  are  to  be  redeemed, 
according  to  a  certain  schedule  adopted.  The  bonds  composing  the  series  thus 
drawn  are  to  be  entered  for  payment  three  months  thereafter,  principal  and 
interest,  and  are  to  be  receivable  for  all  taxes,  licenses,  and  other  obligations  of 
the  city.  At  the  expiration  of  the  three  months,  the  bond  numbers  of  the  drawn 
series  are  to  be  placed  in  a  wheel,  and  1,176  prizes,  amounting  to  $50,000,  are 
to  be  drawn  and  distributed.  Upon  the  plan  the  city  is  released  from  the  pay- 
ment of  the  principal  or  the  interest  of  its  debt,  except  such  portion  as  may  be 
drawn  from  the  lottery  each  year," — "  United  States  Reports,"  vol.  ciii,  p.  363. 
16 


230  NATIONAL  DEFICIT  FINANCIERING. 

three-and-onc-half-per-ccnts  either  to  a  tbrec-per-cent  or  to  a 
two-per-cent  stock,  by  adding  a  sufficient  amount  to  the  nominal 
capital  of  the  debt.  By  the  former  operation,  a  gain  of  be- 
tween £800,000  and  £900,000  a  year  might  immediately  be  ob- 
tained to  the  tax-payer  at  the  expense  of  an  addition  of  £10,- 
000,000  or  £12,000,000  to  the  capital  of  the  debt.  By  the  latter 
the  gain  would  be  £1,200,000  a  year,  but  the  addition  to 
the  capital  would  be  no  less  than  £50,000,000.  Mr.  Goulburn 
rejected  both  these  plans  ;  and,  preferring  the  ultimate  to 
the  immediate  gain,  proposed  a  reduction  of  the  interest  on 
the  portion  of  the  debt  to  3^  per  cent  for  ten  years,  and,to  3 
per  cent  for  at  least  twenty  years  more  ;  adding  nothing  to 
the  capital  of  the  debt,  and  securing  a  saving  of  £025,000  a 
year  till  1854,  and  of  £1,250,000  a  year  afterwards  till  1874, 
when  the  debt  will  be  convertible  or  redeemable  at  the  option 
of  Parliament,  should  circumstances  permit.^ 

In  bringing  this  study  upon  the  policy  of  refunding  to  a 
close,  it  may  be  interesting  to  notice  how  the  debt  of  the 
United  States  came  to  assume  its  present  form.  It  would 
have  been  possible  to  have  taken  steps  toward  reducing  the 
rate  of  interest  as  early  as  May,  18G7,  for  at  that  date  $178,- 
000,000  of  obligations  became  due,  and  the  total  amount 
maturing  in  the  course  of  the  year  was  $925,000,000. 
There  was,  indeed,  a  bill  introduced  into  Congress  for  selling 
a  five-per-cent  bond  with  which  to  pay  outstanding  obliga- 
tions, but  it  does  not  seem  to  have  attracted  much  attention. 
In  1868,  also,  a  similar  bill  passed  Congress,  but  failed  to  re- 
ceive the  approval  of  the  President.  The  tide  of  popular 
sentiment  was  at  this  time  setting  strongly  toward  repudiation. 
The  policy  of  contracting  the  currency,  as  a  first  step  to  the  re- 
sumption of  specie  payments,  had  been  abandoned,  and  there 
was  a  strong  feeling  that  the  money  good  enough  for  the  sol- 
diers was  good  enough  for  the  bondholders.  It  has  already 
been  pointed  out  that  the  saving  occasioned  by  a  refunding 
operation  is  the  just  reward  of  following  that  line  of  conduct 
which  leads  to  high  credit.  But  the  converse  of  this  propo- 
sition is  also  true.  The  maintenance  of  a  high  rate  of  inter- 
est is  the  just  penalty  which  no  people  can  escape  for  casting 

1 "  Twenty  Years'  Financial  Policy,"  p.  56. 


PEACE  MANAGEIIEXT  OP  A  PUBLIC  DEBT.  231 

suspicion  upon  their  own  promises.  This  penalty  was  ex- 
acted from  the  American  people  for  the  five  or  six  years  fol- 
lowing 1868. 

It  was,  however,  soon  recognized  by  Congress  that  no  re- 
duction could  be  effected  in  the  burden  of  the  debt  until 
the  specter  of  repudiation  had  been  laid,  and  to  this  end 
there  was  passed  in  March,  1869,  an  act  entitled,  "An 
Act  to  Strengthen  the  Public  Credit."  This  act  stated 
that,  in  order  to  remove  any  doubt  as  to  the  purpose  of 
the  government,  "its  bonds  would  be  paid  in  coin."  It 
was  then  possible  for  refunding  to  be  undertaken  in  earn- 
est, and  the  year  following,  Mr.  Sumner,  of  Massachusetts, 
introduced  a  bill  for  that  purpose  which  became  a  law  July 
U,  1870. 

The  refunding  bill  of  1870,  which  was  quite  simple,  pro- 
vided for  the  creation  of  three  sorts  of  bonds.  Authority 
was  given  to  issue  $200,000,000  (afterward  raised  to  $500,- 
000,000)  of  five-per-cent  bonds,  redeemable  after  ten  years 
from  the  date  of  their  issue;  also  $300,000,000,  redeem- 
able after  fifteen  years,  bearing  4^  per  cent  interest ;  also 
$1,000,000,000,  redeemable  after  thirty  years,  bearing  4  per 
cent  interest.  All  these  bonds  were  to  be  exempt  from  either 
State  or  Federal  taxation,  and  were  made  payable  at  the  Treas- 
ury of  the  United  States.  The  Secretary  of  the  Treasury  was 
empowered  to  sell  any  of  these  bonds  at  "  not  less  than  their 
par  value  for  coin,"  and  to  apply  the  proceeds  to  the  purchase 
of  matured  debt,  or  to  exchange  the  new  bonds  for  those  out- 
standing, "  par  for  par."  A  sum  equal  to  one  half  of  one 
per  cent  was  allowed  for  defraying  the  expenses  of  conver- 
sion. It  is  not  necessary  to  give  in  detail  the  various  trans- 
actions by  which  the  Federal  debt  was  changed  to  its  present 
form.  The  following  table,  which  presents  the  status  of  the 
debt  at  the  beginning  of  each  fiscal  year  since  1870,  displays 
the  result  of  the  refunding  bill.^ 

^  A  more  detailed  account  of  refunding  may  be  found  in  an  article  by  Mr. 
Worthington  Ford,  in  Lalor's  "  Cyclopaedia  of  Political  Science,"  also  in  Bolles'e 
"Financial  History  of  the  United  States,"  1861-1885,  pp.  305-341. 


232 


NATIONAL   DEFICIT   FINANCIERING. 


Toihle  showing  the  cJianges  in  the  National  Debt  since  1870. 


July  1, 1870 . 
July  1, 1S71 . 
July  1, 1S72 . 
July  1,  1873  . 
July  1,1874. 
July  1, 1S75 . 
July  1, 1876 . 
July  1, 1877 . 
July  1, 1878 . 
July  1, 1879 . 
July  1, 18S0 . 
July  1, 1831 . 


July  1, 1882 , 

July  1, 1883 

July  1,  1884 

July  1,1885 

November  1, 1855.. 
December  1,1886.. 


Six-per-cent 

bonds. 


11,764,932,800 

1,613,897,300 

1,874,883,800 

1,281,2.38,650 

1,213,624,700 

1,100,86.5,.'J50 

984,999,650 

854,621,^50 

733,619,000 

310,982,500 

285,7>i0,400 

196,878,600 

Continued  at 

8i  per  cent. 

58,957,150 


Five-per-c«nt 
bouds. 


$221,539,800 
274,236,450 
414,507,300 
414,567,300 
510,628,050 
607,132,750 
711,655,800 
703,266,650 
703,206.650 
616,905,500 
4^,364,900 
439,341,8.50 

Continued  at 

8J  per  cent. 

401,593,900 

82,032,600 

8  per  cents. 
8^,204,850 
224.612,1.50 
194,190.500 
194,190,500 
71,154,250 


Four-and-a- 
half- per- cent 
bunds. 


Foot- per- 
cent bondA. 


$140,000,000 
240,000,000 1 198,850,000 
250,000,000  679,873,110 
250,000,000  739.347,500 
260,000,000  789,847,800 


250,000,000  789,849,850 

^  250,000,000  737,942,200 

250,000,000  737,661,700 
250,000.00O|787,719,S50 
250,0O0,OO0:787,740,.35O 
250,000,000 1 737,779,900 


9>6. 


621. 
i;«. 
451, 

so.'i, 

•252, 
99^. 

0*5, 

T^i 
,716, 
,998. 
,667, 


0<jO 
.50 
100 
'.».V» 
750 
300 
450 
.Vtl) 
,650 
,110 
,100 
,760 


1,449,810,400 

1,824,229,160 

1,212,278.8.50 
1,131,910,850 
1,181,9.30,350 
1,068,934,160 


Pacific  sixes  amounting  to  $64,623,512,  the  Navy  pension  fund,  amounting  to  114,000,000  In 
three  per  cents,  the  interest  upon  which  is  applied  to  the  payment  of  naval  pensions  exclu- 
sively, and  $223,800  of  refunding  certificates,  are  not  included  in  the  table. 

But  what  may  be  said  of  the  principles  involved  in  the 
law,  or  suggested  by  the  manner  in  M^hich  it  was  carried  out  ? 
Most  of  the  points  have  been  already  discussed,  but  there 
yet  remain  two  or  three  questions  that  should  claim  attention. 

Is  it  wise  to  guarantee  bonds  against  State  or  Federal 
taxation  ?  In  discussing  this  question,  men  are  too  apt  to 
dwell  upon  the  special  privileges  granted  the  bondholding 
class  in  case  this  species  of  property  is  not  taxed.  Class  ex- 
emption is  certainly  an  injustice,  but  such  a  generality  does 
not  touch  the  point  at  issue.  The  question  is  one  that  has 
primarily  to  do  with  figures  and  balances.  As  the  price  of 
bonds  rises,  the  rate  of  interest  that  must  be  paid  falls.  It 
is,  therefore,  of  advantage  that  bonds  be  quoted  at  a  high 
figure.  But  one  of  the  most  important  elements  in  raising 
the  price  of  obligations  is  clearness  and  certainty  of  contract. 
There  must  be  no  contingencies,  no  loop-holes,  no  reserved 
rights,  no  possibility  that  a  change  of  public  policy  may 
affect  the  value  of  the  property  bought.     Should  a  govern- 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      233 

ment  reserve  the  right  to  tax  its  own  bonds,  the  uncertainty 
attaching  to  such  property  would  depress  its  price.  Such 
bonds  would  not  sell  unless  the  government  offered  a  higher 
rate  of  interest  than  would  otherwise  float  them  at  par.  It 
is  true  the  government  retains  an  additional  source  of  rev- 
enue— the  tax  on  the  bonds — but  this  is  offset  by  the  addi- 
tional expenditure  entailed  by  the  increased  interest-pay- 
ments. 

The  question,  therefore,  reduces  itself  to  this  :  Is  the  in- 
crement of  revenue  flowing  from  the  tax  likely  to  be  more 
than  the  additional  expenditure  occasioned  by  retaining  the 
right  to  tax  the  bonds?  "We,  of  course,  assume  that  this 
right  will  not  be  so  employed  as  to  extinguish  the  value  of 
public  securities,  but,  on  the  basis  of  this  assumption,  there 
is  little  doubt  as  to  the  proper  answer  to  the  question.  The 
current  burden  of  a  public  debt  is  lightened  by  exempting 
securities  from  taxation,  provided  only  the  administration 
adopt  the  policy  of  frequent  conversions.  It  may  be  said 
that  the  purchasers  pay  their  tax  in  the  enhanced  price  they 
pay  for  the  bonds. 

Another  interesting  point  respecting  conversion  is  sug- 
gested by  the  fact  that  the  law  of  1870  provided  for  three 
classes  of  bonds,  each  class  bearing  a  different  rate  of  inter- 
est, and  granted  different  dates  of  maturity.  This  method 
of  procedure  is  severely  criticised  by  M.  Leroy-Beaulieu,  who 
commends  by  preference  the  method  of  conversion  adopted 
in  England.  According  to  the  English  policy  of  conversion, 
the  operation  is  addressed  to  the  entire  amount  of  a  given 
class  of  obligations,  and  the  conversion  results  in  the  estab- 
lishment of  uniform  debt.  This  does  not,  however,  quite 
bring  the  distinction  between  the  two  systems  clearly  before 
the  mind. 

The  real  point  of  difference  turns  on  this  question :  Is 
it  best  to  adopt  a  policy  of  frequent  conversion,  by  means  of 
which  a  small  saving  is  effected,  or  a  policy  of  few  conver- 
sions with  larger  immediate  gain  as  the  result  of  the  opera- 
tion ?     If  the  policy  first  mentioned  be  the  appropriate  one, 


234?  NATIONAL  DEFICIT  FINANCIERING. 

it  is  certainly  unwise  to  provide  in  the  same  law  for  tlie 
conversion  from  6  per  cent  to  5  per  cent,  and  also  from  6 
per  cent  to  4  per  cent;  for,  if  bonds  of  tlie  former  class 
are  worth  but  par,  those  of  the  latter  can  only  sell  if  pur- 
chasers are  guaranteed  a  long  enjoyment  of  that  rate  of  in- 
terest. This  question,  which  pertains  to  the  proper  length 
of  guarantee  against  a  new  conversion,  has  received  adequate 
attention,  but  it  is  here  presented  in  a  little  different  light. 

"Wherever  a  permanent  debt  is  established,  and  there  is 
no  thought  of  quick  payment  of  the  principal,  the  plan  of 
frequent  conversions  on  small  margins  is  defensible ;  for,  in 
the  course  of  a  long  run  of  years,  this  plan  will  grant  the 
country  greater  relief.  A  country  can  afford  to  bear  a 
slightly  increased  payment  this  year,  in  order  that  five  years 
hence  a  five-per-mUl  conversion  may  be  effected.  But,  if  the 
debt  is  in  rapid  process  of  expungement,  the  same  conclusion 
does  not  follow.  It  may  be  wise  to  effect  a  large  immediate 
saving  upon  part  of  the  debt,  by  granting  a  long  guarantee, 
for  the  purpose  of  securing  additional  funds  with  which  to 
carry  on  the  policy  of  debt-payment  upon  the  high-priced 
bonds. 

It  is  true  that,  in  the  course  of  ten  years,  the  government 
may  find  itself  paying  higher  rates  upon  its  outstanding 
bonds  than  the  rate  for  which  fresh  money  could  be  bor- 
rowed ;  but  this  is  partly  compensated  by  the  fact  that  fewer 
bonds  are  outstanding,  some  of  them  having  been  extin- 
guished by  applying  to  their  principal  the  amount  saved 
through  long-time  conversion.  This,  as  it  appears  to  me,  is 
the  only  defense  of  the  American  method  of  refunding  as 
eomj)ared  with  the  English.  It  is  perfectly  logical  for  M. 
Leroy-Beaulieu  to  approve  frequent  conversions  at  uniform 
rates,  for  he  does  not  permit  the  question  of  paying  the 
principal  to  modify  his  argument. 

In  considering  the  act  of  1870,  however,  we  are  con- 
strained to  say  that  a  little  too  much  was  taken  for  granted. 
It  would  have  been  much  vdser  for  the  statesmen  of  that 
day  to  have  held  a  little  closer  to  the  facts  as  they  knew 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      £35 

them,  and  not  have  bound  the  government  to  pay  4  per 
cent  upon  $740,000,000  of  bonds  until  1907.  These  obhga- 
tions  are  now  selKng  at  rates  which  show  that  a  three-and-a- 
half-per-cent  bond  with  the  same  guarantee  could  be  success- 
fully placed  on  the  American  market,  and  the  excessive 
payments  that  must  be  maintained  for  twenty  years  are  the 
source  of  greater  loss  to  the  country  than  the  immediate  sav- 
ing upon  the  long-time  bonds,  however  that  saving  might  be 
applied.  While,  then,  we  may  approve  the  general  principle 
underlying  the  refunding  act  of  1870,  we  are  obliged  to  criti- 
cise the  manner  in  which  it  was  applied. 

A  refunding  operation,  like  the  placement  of  a  new  debt, 
may  be  carried  on  through  the  agency  of  a  syndicate  of 
bankers,  or  by  the  direct  management  of  the  government. 
In  the  former  case  the  business  is  farmed  out.  The  bankers 
forming  the  syndicate  agree  to  place  the  new  bonds  at  their 
own  expense,  paying  for  printing,  transfer,  and  exchange,  in 
consideration  for  a  stipulated  commission.  In  the  latter  case 
the  Secretary  of  the  Treasury  takes  all  risks  and  pays  all  ex- 
penses. During  the  late  war,  the  usual  appropriation  for  the 
placement  of  a  new  loan  was  one  per  cent,  and,  according  to 
European  experience,  this  was  not  regarded  as  an  excessive 
rate.  But  it  is  reasonable  to  expect  that  tlie  refunding  of  an 
existing  debt  in  time  of  peace  may  be  carried  through  at 
much  less  expense,  and  we  are  not  surprised  to  notice  that 
the  appropriation  allowed  by  the  law  of  1870  was  reduced 
to  one  half  of  one  per  cent.  But  is  it  wise  to  employ  a  syn- 
dicate, or  should  the  government  be  its  own  agent  ?  This 
question  does  not  turn,  as  many  seem  to  suppose,  on  the  de- 
sirability of  concentrated  or  diffused  loans.  The  original 
method  adopted  for  the  sale  of  bonds  exerts  little  influence 
upon  their  final  residence  when  once  thrown  upon  the  market. 

The  point  at  issue  is  partly  one  of  administration,  but 
pertains  primarily  to  the  relative  economy  of  the  two  meth- 
ods. And  it  is  fortunate  that  we  are  not  left  to  speculation 
in  deciding  the  question.  Previous  to  the  summer  of  1877, 
all  operations  in  refunding  were  carried  on  by  syndicates, 


236  NATIONAL  DEFICIT  FINANCIERING. 

the  commission  allowed  being  the  total  amount  appropriated 
by  the  law  to  cover  the  expense  of  conversion.  Secretaries 
Boutwell,  Eichardson,  and  Bristow  sold  $500,000,000  of 
five-per-cents  at  a  cost  to  the  government  of  $2,500,000. 
Secretary  Morrill  also  made  a  contract  for  the  place- 
ment of  $300,000,000  of  four-per-cents  upon  the  same  terms, 
of  which  $198,000,000  were  sold  at  a  cost  of  $925,000.  But 
when  Secretary  Sherman  took  the  treasury  portfolio,  the 
plan  of  placing  bonds  by  syndicates  was  abandoned  for  ^sale 
upon  public  advertisements,  or,  as  it  was  termed,  "  under 
circulars."  This  plan  was  followed  for  the  entire  amount 
of  four-per-cents,  with  the  exception  of  about  $15,000,000 
which  were  secured  on  a  foreign  contract.  The  resumption 
bonds  were  also  sold  through  a  syndicate,  but  with  these  two 
exceptions  Mr.  Sherman  himself  managed  the  sales  for  the 
Treasury.  The  method  of  procedure  was  quite  simple.  The 
Secretary  issued  a  circular  descriptive  of  the  new  bonds  and 
stated  the  terms  on  which  subscriptions  would  be  received. 
All  subscriptions  were  to  be  accompanied  with  2  per  cent  of 
the  purchase  money,  the  remainder  to  be  paid  within  thirty 
days,  at  the  pleasure  of  the  subscriber,  but  upon  such  payments 
interest  was  allowed  at  the  rate  of  4  per  cent.  A  commis- 
sion, also,  of  one  eighth  of  one  per  cent  was  allowed  on  all 
subscriptions  over  $1,000.  Under  this  circular,  which  was 
dated  January  16, 1878,  about  $125,000,000  of  bonds  were  sold. 
Upon  January  1,  1879,  a  new  circular  was  issued,  which 
changed  slightly  the  proposals  of  the  Secretary,  the  most  im- 
portant modification  being  that  the  commission  increased  with 
the  size  of  the  subscriptions.  One  eighth  of  one  per  cent  was 
allowed  on  all  subscriptions  under  $1,000,000,  one  fourth  of 
one  per  cent  on  all  subscriptions  over  $1,000,000  and  not  ex- 
ceeding $10,000,000,  and  for  offers  beyond  that  figure  an 
additional  one  tenth  of  one  per  cent  was  granted.  "  My  ob- 
ject," says  the  Secretary,  "  was  to  get  a  strong  competition 
between  the  great  banks  that  were  then  competing,"  but  the 
plan  gave  rise  to  discontent,  and  was  soon  abandoned  for 
a  uniform  commission  of  one  eighth  of  one  per  cent.  > 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      237 

Another  dodge  to  secure  quick  sales  may  be  noticed  in 
passino-.  It  was  provided  that  those  bonds  last  subscribed 
should  be  first  paid.  The  loan  being  of  such  a  sort  that 
len^i-th  of  investment  is  an  advantage  to  the  purchaser,  it 
was  hoped  that  this  stipulation  would  induce  a  ready  sale  for 
the  first  bonds  placed  on  the  market.  The  importance  of 
such  a  provision  will  be  recognized  when  it  is  noticed  that 
the  diflBculty  of  placing  a  new  loan  is  always  at  the  start ; 
after  a  loan  is  well  advertised  it  will  run  itself. 

The  success  of  the  policy  of  sale  by  circulars  may  be  seen 
from  the  following  facts  :  The  total  sale  of  four-per-cent 
bonds  amounted  to  $740,847,800.00;  the  cost  of  this  sale 
according  to  the  plan  followed  by  the  other  Secretaries 
would  have  been  $3,704,239.00,  by  the  method  adopted  by 
Mr.  Sherman  it  was  effected  at  a  cost  of  $2,645,802.60.^ 
And,  as  illustrative  of  the  statement  made  above  that  the 
diflBculty  of  a  loan  is  at  the  start,  it  appears  that  this  saving 

1  "  Interview  between  the  Finance  Committee  of  the  Senate  and  the  Secretary 
of  the  Treasury,"  1881,  p.  19.  The  expense  of  this  operation  by  items  may  be 
interesting : 

Statement  showing  the  expenses  o/issuhiff  the  four-per-cent  consols  of  1907. 

Conjmissions  paid  to  the  syndicate $386,369  68 

Commissions  paid  under  the  circulars , 1,563,523  28 

Extra  force  employed 190,633  82 

Extra  compensation  paid 9,968  56 

Engraving  plates  and  printing  bonds  and  certificates 308,465  38 

Transportation  by  express,  messengers,  etc 163,381  29 

Incidental  expenses 23,460  60 

Total  amount  expended 82,645,802  60 

Total  amount  of  subscriptions  to  the  four-per-cent  consols  of 

1907,  to  date $697,939,550  00 

Amount  exchanged  for  5-20's  and  10-40's 2,895,600  00 

Amount  of  refunding  certificates  sold 40,012,750  00 

Total $740,847,800  00 

One  half  of  one  per  cent  appropriation  on  the  above  amount.       $3,704,239  00 
Amount  expended  from  this  fund 2,645,802  60 

Remaining  unexpended $1,058,436  40 


238  NATIONAL  DEFICIT  FINANCIERING. 

of  $1,058,436.40  was  made  on  the  sale  of  the  last  $300,000,- 
000  of  bonds.  The  teaching  of  this  experiment  is  in  har- 
mony with  the  views  presented  in  this  essay  throughout, 
that  in  matters  of  administration  it  is  wise  for  the  govern- 
ment to  keep  itself  independent  of  the  agencies  of  banks. 
Popular  enthusiasm  brings  banking  support,  but  banking 
enthusiasm  can  not  arouse  popular  interest.  It  may  be 
said  that  the  amount  saved  from  the  appropriation  is  not 
of  much  importance  to  the  government,  and  that  is  true  so 
far  as  the  money  is  concerned;  but  it  is  certainly  worth 
something  to  the  credit  of  the  government  that  the  cost  of 
its  financial  operations  is  less  than  the  cost  regarded  as  neces- 
sary by  European  peoples.  It  is  these  little  things,  showing 
administrative  ability,  that  make  up  the  financial  standing  of 
a  state. 

The  peace  management  of  public  debts  as  a  financial 
question  is  not  difficult  to  understand,  though  it  brings  to 
view  many  points  of  intricate  detail.  The  conclusions  to 
which  our  study  respecting  it  seem  to  point  are  as  follows. 
The  financier  should  at  all  times  have  a  just  regard  to  the 
needs  of  investors  in  giving  shape  to  the  public  debt ;  he 
should  be  well  versed  in  commercial  relations  so  as  to  render 
wisely  such  assistance  as  lies  within  his  power  in  time  of 
commercial  pressure;  he  should  endeavor  to  maintain  har- 
mony at  all  times  between  the  form  of  the  debt  and  the 
various  laws  dependent  upon  it  for  their  successful  working ; 
and  above  all  he  should  have  clear  views  respecting  the 
policy  of  conversion.  Our  study  upon  conversion,  also,  has 
led  us  to  perceive  that  no  possible  argument  can  lie  against  it 
as  a  policy  ;  that  the  first  step  toward  the  realization  of  the 
benefits  it  affords  is  the  establishment  of  public  credit ;  that 
a  refunding  law  should  not  be  so  drawn  as  to  embarrass  the 
policy  of  debt-payment  or  prevent  additional  savings  by  fu- 
ture conversions ;  and  that  the  same  considerations  which  de- 
mand that  bonds  shall  in  the  first  instance  be  issued  at  par 
call  for  par  conversions.  The  refunding  act  of  1870  may  on 
the  whole  be  approved.    Bonds  should  be  exempt  from  tax- 


PEACE  MANAGEMENT  OF  A  PUBLIC  DEBT.      £39 

ation,  but  it  seems  that  an  unnecessarj  privilege  was  granted 
public  creditors  in  the  issue  of  a  four-per-cent  bond  to  run  for 
tliirtj  years.  So  far  as  the  details  of  the  operation  are  con- 
cerned, the  experience  of  the  United  States  leads  to  the 
approval  of  refunding  under  the  advertisement  of  treasury 
circulars,  rather  than  by  means  of  syndicates. 


CHAPTER  V. 

PAYMENT   OF   PUBLIC   DEBTS. 

The  fiual  topic  in  connection  with  national  deficit  finan- 
ciering pertains  to  the  policy  and  method  of  debt-payment. 
Is  it  wise  for  a  people  to  endeavor  to  expunge  a  public  debt  ? 
If  so,  at  what  time  should  the  policy  of  payment  properly 
begin  ?  At  what  rate  should  payment  be  carried  on  when 
once  begun  ?  "What  plan  for  the  expungement  of  public 
obligations  is  most  in  harmony  with  sound  principles  of 
finance  ?  Such  are  the  questions  claiming  our  attention  in 
the  present  chapter. 

Does  sound  policy  demand  the  payment  of  a  Pudlio 
DeUf 

The  policy  adopted  by  the  United  States  with  regard  to 
the  expungement  of  its  obligations  is  not  of  wide  acceptance. 
From  the  time  that  Gallatin  assumed  control  of  the  Federal 
Treasury  to  the  present,  the  American  people  have  mani- 
fested a  strong  dislike  to  the  perpetuation  of  a  funded  debt, 
but  in  other  countries  this  sentiment  fails  to  find  response. 
It  is  true  that  England  and  Holland  appear  to  appreciate  the 
arguments  for  the  extinction  of  public  obligations ;  but  the 
Latin  peoples,  whether  in  Europe  or  in  South  America,  as 
well  as  those  peoples  of  Eastern  and  Asiatic  civilization  who 
have  come  in  contact  with  and  imitate  European  manners, 
do  not  attach  much  importance  to  the  necessity  of  reducing 
the  principal  of  their  debts.  It  thus  appears  that  the  advisa- 
bility of  debt-payment  admits  of  serious  discussion. 

Yet  it  should  be  clearly  discerned  at  the  beginning  that 


PAYMENT  OF  PUBLIC  DEBTS.  211 

this  discussion  does  not  turn  upon  a  question  of  principle, 
but  lias  wholly  to  do  with  methods  of  procedure.  It  is  now 
universally  admitted  that  a  debt  can  only  be  paid  out  of  sur- 
plus revenue,  and  all  financiers  readily  accede  to  the  proposi- 
tion that  financial  burdens  at  any  time  imposed  upon  the  in- 
dustries of  a  country  should  be  as  light  as  possible.  The 
real  point  in  controversy  pertains  to  the  best  way  of  attain- 
ing this  end,  a  statement  that  may  be  easily  understood  if 
we  consider  for  a  moment  the  elements  that  go  to  make  up 
the  burden  of  a  debt. 

The  constituent  elements  of  this  burden  are  the  principal 
of  the  debt,  or  the  amount  to  be  paid ;  the  annuity  occa- 
sioned by  the  debt,  or  the  annual  interest  demanded ;  and 
the  industrial  condition  of  the  country,  or  the  underpinning 
of  the  debt.  This  factor  last  mentioned  should  receive  due 
recognition,  since  the  argument  in  favor  of  perpetual  indebted- 
ness rests  upon  an  overestimation  of  its  importance  ;  and  it 
must  be  conceded  that  the  true  conception  of  a  burden  of 
any  sort  brings  to  mind  not  merely  the  weight  carried,  but 
compares  that  weight  with  the  strength  of  him  who  carries  it. 
It  is  at  tliis  point  that  the  two  schools  of  finance  part  com- 
pany. The  one  would  reduce  the  burden  of  the  debt  by 
extinguishing  its  principal,  the  other  would  accomplish  the 
same  purpose  by  developing  national  resources. 

There  are  two  classic  arguments  put  forth  by  those  who 
defend  the  policy  of  perpetual  indebtedness.  It  is  claimed, 
in  the  first  place,  that  the  pressure  of  a  public  debt  is  neces- 
sarily decreased  from  year  to  year  by  the  gradual  depreciation 
in  the  value  of  the  monetary  unit  in  which  all  obligations 
are  expressed  ;  this  depreciation  being  the  result  of  constant 
additions  made  to  the  amount  of  money  material,  and  of  con- 
tinued development  of  the  mechanisms  of  exchange.^     This 

'  "  The  most  remarkable  effect  of  the  depreciation  of  gold  is  a  considerable 
reduction  of  the  national  debt.  The  national  debt  of  this  country  (England) 
was  in  1860  represented  by  a  capital  of  £819,079,305.  The  annual  charge  was 
then  £26,l'76,2v5.  A  gold  depreciation  of  9  per  cent,  which  is  quite  the  least  I 
can  believe  to  have  occurred,  must  therefore  have  effected  a  reduction  in  the 


242  NATIONAL  DEFICIT  FmANCIERING. 

argument,  however,  does  not  call  for  extended  consideration. 
The  fact  which  it  states  as  a  general  fact,  taking  into  view 
the  variations  of  the  precious  metals  from  century  to  cent- 
ury, can  not  be  denied,  although  there  is  some  reason  for 
believing  that  the  tendency  of  gold  to  fall  in  value  has,  at 
the  present  time,  received  a  temporary  check.  But  without 
relying  upon  such  a  suggestion  for  our  decision,  it  certainly 
seems  that  gradual  depreciation  is  too  tardy  in  its  workings 
to  be  worthy  serious  consideration.  Before  the  burden  of  a 
debt,  like  that,  for  example,  which  the  United  States  is  bear- 
ing, could  be  sensibly  diminished  through  depreciation  in 
the  value  of  the  monetary  unit,  an  addition  of  a  tenth  of  one 
per  cent  to  the  annual  interest  payments  would  have  extin- 
guished the  principal. 

The  second  argument  for  perpetual  indebtedness  is 
worthy  more  serious  consideration.  Why,  it  is  asked,  should 
a  people  bear  a  high  rate  of  taxation  for  the  purpose  of  re- 
ducing the  principal  of  a  debt,  when  all  the  practical  effects 
of  debt-reduction  may  be  realized  through  the  natural  growth 
and  prosperity  of  the  nation  ?  ^  A  wise  policy,  it  is  claimed, 
demands  that  the  entire  energy  of  the  country  be  given  to 
the  development  of  industries,  and  to  the  increase  of  wealth 
and  numbers ;  since  the  financial  ability  of  the  country  may 
in  this  manner  be  so  greatly  enhanced  that  the  pressure  of 
the  debt  will  cease  to  be  felt.  The  experience  of  England 
is  often  cited  in  support  of  this  view.  The  pressure  of  her 
debt  in  1815  is  computed  as  equivalent  to  9  per  cent  of  her 

capital  of  about  £V5,000,000,  and  in  the  annual  charge  of  nearly  £2,500,000." 
— Prof.  Jevons,  in  "  A  Serious  Fall  in  the  Value  of  Gold."  pp.  6*7,  58.  This 
was  published  in  1863. 

^  Qu'avaient  besoin  les  fitats-Unis  d'amorter  le  capital  de  leur  dette  consoli- 
dee  ?  Le  poids  de  celle-ci  diminuait  tous  les  jours  par  la  reduction  du  taux  de 
I'inter^t,  par  le  developpement  de  la  richesse  publique,  par  I'arrivee  des  immi- 
grants, par  I'augmentation  de  la  population.  Une  dette,  qui  ^tait  assez  lourde 
pour  35  millions  d'habitants,  serait  devenue  bientot  insignifiante  pour  un  pays 
de  80  k  100  millions  d'ilmes,  ayant  un  territoire  presque  illimit6.  Les  Etats- 
Unis  ont  done  fait  un  grand  sacrifice  pour  un  bien  mince  resultat." — Paul  Leroj- 
Beaulieu,  "  Traite  de  la  Science  des  Finances,"  ii,  pp.  446,  447- 


PAYMENT  OF  PUBLIC  DEBTS.  243 

yearly  income ;  in  18S0  it  was  observed  to  be  less  than  3  per 
cent ;  but  tbis  reduction  bad  been  effected  not  by  the  ex- 
pungement of  her  obligations  but  by  the  growth  of  national 
wealth.  The  actual  result,  so  far  as  debt-burden  is  con- 
cerned, is  the  same  as  though  two  thirds  of  the  principal  had 
been  paid  while  the  amount  of  her  wealth  remained  station- 
ary. In  France,  also,  one  may  discover  the  working  of  the 
same  principle,  although  in  this  instance  the  pressure  of 
the  debt  remained  constant,  or  is  increased  very  slightly, 
while  the  capital  sum  of  her  obligations  has  greatly  in- 
creased. Thus  the  capitalized  sum  of  the  French  debt  was 
in  1840  $850,000,000,  in  1870  it  was  $2,750,000,000 ;  but  the 
pressure  of  the  annual  payments  demanded  by  these  debts, 
computed  upon  national  income  for  the  respective  periods,  is 
found  to  be  '022  and  '023.^  That  is  to  say,  the  national  in- 
come of  France  increased  at  a  rate  nearly  as  rapid  as  that 
of  her  debt,  notwithstanding  the  extravagances  of  the  first 
empire.  But  it  should,  perhaps,  be  added,  that  this  favor- 
able exhibit  has  been  destroyed  by  the  financial  disasters 
occasioned  by  the  Franco-Prussian  war. 

It  is  upon  such  facts  as  these  that  the  common  argument 
in  support  of  the  policy  of  perpetual  indebtedness  is  based, 
and,  80  far  as  the  facts  are  concerned,  there  is  no  room  for 
controversy.  But  the  conclusion  of  the  argument  may  not 
60  readily  be  accepted,  for,  if  it  can  be  shown  that  the  pay- 
ment of  the  principal  of  a  debt  has  no  tendency  to  retard 
the  industrial  development  of  a  nation,  the  entire  course  of 
reasoning  falls  to  the  ground.  As  opposed  to  the  idea  from 
which  this  reasoning  must  proceed,  I  venture  to  place  the 
following  proposition,  which,  if  maintained,  will  furnish  an 
incontrovertible  argument  in  favor  of  the  policy  which  the 
United  States  has  adopted  : 

The  payment  of  the  principal  of  a  debt  tends  neither  to 
impoverish  a  nation  nor  to  retard  its  material  development  ^ 

'  Cf.  "National  Debts,"  by  R.  Dudly  Baxter,  p.  55;  and  "Fenn  on  the 
Funds,"  p.  436. 


244:  NATIONAL  DEFICIT  FINANCIERING. 

hut,  on  the  other  hand,  the  maintenance  of  the  principal  and 
the  constant  j^ayment  of  accruing  interest  tend  to  cripple 
the  productive  capacity  of  any  people. 

The  two  parts  of  tliis  proposition  should  receive  separate 
attention,  and  we  are  led  first  to  inquire  if  the  industries  of 
a  country  are  injuriously  affected  by  the  process  of  payment. 
It  is  admitted  by  all  that  somewhere  in  the  course  of  deficit 
financiering — either  at  the  time  the  debt  was  established,  or 
during  the  period  that  it  was  carried,  or  at  the  date  o\  its 
payment — a  loss  is  sustained  chargeable  to  the  adoption  of  the 
loan  policy.  Should  one  reason  from  the  analogy  of  private 
debts,  he  will  conclude  that  this  burden  is  borne  at  the  time 
when  the  debt  is  paid ;  for  when  an  individual  debtor  clears 
himself  from  obligations,  he  loses  control  over  a  certain 
amount  of  capital,  and  consequently  lessens  his  importance 
as  a  member  of  industrial  society.  But  such  reasoning  can 
not  be  applied  to  the  state.  The  state  is  not  an  individual, 
it  has  no  life  separate  from  the  united  lives  of  all  citizens, 
and  it  recognizes  no  interest  but  the  collective  interest  of  so- 
ciety. The  state  is  the  corporate  representative  of  all  citi- 
zens, creditors  as  well  as  debtors,  and  is  not  at  all  interested 
in  the  proprietary  residence  of  capital,  provided  only  it  be 
judiciously  employed.  Since,  then,  the  payment  of  its  own 
obligations  effects  no  more  than  a  transfer  of  control  over 
capital  from  one  set  of  men  to  another,  it  can  not  be  said 
that  the  industrial  development  of  the  country  is  thereby 
obstructed. 

The  position  here  assumed  may  be  easily  understood  if 
one  hold  firmly  in  mind  the  nature  of  capital.  Capital  is 
subsistence  fund,  and  he  who  controls  it  has  it  in  his  power 
to  direct  labor.  It  is  capital  which  the  state  wants  when  it 
borrows  money,  and  in  borrowing  capital  it  draws  to  its  own 
use  that  which,  had  it  not  been  thus  appropriated,  might 
have  been  applied  to  some  productive  industry  under  private 
management.  The  obligations  which  the  state  creates  against 
itself  are  written  in  the  language  of  money,  because  this  is 
the  most  convenient  language  known  for  the  expression  of 


PAYMENT  OF  PUBLIC  DEBTS.  245 

indebtedness ;  but  the  state  has  no  use  for  money  except  to 
effect  the  transfer  to  itself  of  control  over  existing  capital. 

Suppose  a  state  to  borrow  a  billion  dollars ;  it  can  not  be 
said  that  industrial  society  is  thereby  necessarily  rendered 
any  the  poorer.  Capital  is  not  destroyed  by  the  borrowing. 
Before  the  loan  was  filled,  the  nation  was  possessor  of  a  cer- 
tain amount  of  capital,  distributed  in  a  thousand  funds  and 
under  the  direction  of  a  thousand  wills ;  after  the  loan  the 
nation  as  a  whole  holds  the  same  amount  of  capital  as  before, 
the  only  difference  being  that  control  over  it  has  passed  to 
the  state.  Whether  or  not  this  operation  is  industrially 
detrimental  depends  upon  the  use  to  which  the  state  puts 
the  proceeds  of  its  loan.  If  this  be  consumed  in  the  prose- 
cution of  a  war,  the  nation  is  impoverished  to  the  extent  of 
the  unproductive  consumption,  since  capital,  in  the  form  of 
bacon,  flour,  clothes,  implements,  mules,  and  the  like,  has 
been  destroyed.  "We  may,  then,  conclude  that  the  injury 
sustained  on  account  of  a  loan  for  war  purposes  is  sustained 
at  the  time  the  loan  was  contracted,  and  is  due  to  the  fact 
that  the  state  has  caused  a  certain  amount  of  capital  to  dis- 
appear without  hope  of  recovery. 

Let  us  now  turn  to  the  process  of  payment.  The  obliga- 
tions which  the  state  has  created  against  itself  call  for  the 
payment  of  a  certain  amount  of  money.  The  money,  which 
it  obtains  by  means  of  taxation,  is  held  for  a  moment,  then 
transferred  to  the  public  creditors,  and  in  this  manner  the 
state  becomes  absolved  from  its  indebtedness.  It  would  of 
course  be  incorrect  to  say  that  this  transfer  of  money  from 
one  set  of  citizens  to  another  does  not  in  the  least  disturb 
capital,  for  possession  of  money  is  the  evidence  of  ownership 
in  capital ;  but  it  may  be  rightly  claimed  that  it  does  not 
destroy  capital.  Before  the  payment,  one  set  of  individuals 
controlled  the  subsistence  fund  of  the  country  to  the  extent 
of  the  payment ;  after  the  extinction  of  the  debt,  ownership 
rests  with  another  set  of  individuals.  The  government  is 
freed  from  the  necessity  of  providing  an  annual  sum  in  the 
form  of  interest,  and,  measured  by  the  amount  of  capital  in 
17 


24:6  NATIONAL  DEFICIT  FINANCIERING. 

tlie  country,  tlie  nation  is  in  no  wise  impoverished.  There 
is  the  same  amount  of  food  for  the  subsistence  of  laborers, 
and  the  same  amount  of  raw  stuffs  upon  which  to  set  them 
at  work.  If  the  new  masters  of  capital  are  as  enterprising 
as  the  old,  the  nation  loses  nothing  by  the  payment  of  its 
debt.  This  is  the  explanation,  and  in  the  explanation  lies 
the  defense  of  the  proposition  that  the  payment  of  a  public 
debt  does  not  necessarily  impoverish  a  nation.  The  injury 
to  industrial  society  is  worked  by  the  destruction  of  cajjital 
at  the  time  the  loan  was  contracted  ;  the  labor  required  to 
create  again  the  capital  thus  destroyed  constitutes  the  bur- 
den imposed  upon  the  nation  ;  the  pajTnent  of  the  principal 
of  the  debt  is  at  most  but  a  re-adjustment  of  ownership  in 
existing  capital.  It  is  a  fallacy  to  argue  that  the  expunge- 
ment of  public  obligations  destroys  capital. 

But  how  is  a  people  impoverished  by  the  maintenance  of 
the  principal  of  a  debt  ?  In  so  far  as  bondholders  live  from 
the  proceeds  of  their  bonds,  they  form  a  class  not  imme- 
diately interested  in  current  industries.  At  some  time  in 
the  past  they  may  have  furnished  the  government  with  large 
sums  of  capital,  thus  averting  the  inconvenience  of  excessive 
taxation  or  of  a  sudden  change  in  rates ;  and,  in  return  for 
this  service,  they  received  from  the  government  the  promise 
of  an  annuity  until  an  equivalent  of  the  original  capital 
should  be  returned.  Sucb  persons  are  guaranteed  a  living 
without  labor. 

There  is  but  one  way  in  which  the  government  may  es- 
cape the  necessity  of  supporting  in  idleness  this  class,  and 
that  is  by  paying  its  members  their  respective  claims.  The 
bondholders  would  in  this  manner  be  deprived  of  their  se- 
cured annuity,  but  they  would  in  its  stead  hold  a  sum  of 
free  capital ;  and  if  they  wish  to  continue  in  the  enjoyment 
of  an  income  from  their  property  they  must  apply  their 
funds  to  some  productive  purpose.  In  this  manner  the  coun- 
try gains  by  bringing  to  bear  upon  industrial  affairs  the 
interested  attention  of  those  who  formerly  were  secured  a 
living  from  tbe  proceeds  of  public  taxes.     For  another  reason 


PAYMENT  OF  PUBLIC  DEBTS.  247 

also  is  tlie  payment  of  a  debt  advantageous.  No  people  can 
long  retain  that  hopefulness  so  essential  to  the  vigorous 
prosecution  of  industries  if  the  past  lays  heavy  claims  upon 
the  present.  As  a  rule,  they  only  should  partake  of  current 
product  who  are  in  some  way  connected  with  present  pro- 
duction. Carelessness  and  jealousy  are  not  characteristics 
of  efficient  labor,  but  they  are  sentiments  naturally  engen- 
dered by  the  payment  of  taxes  for  the  support  of  a  favored 
class.  It  is  the  pemianency  of  this  payment,  rather  than  its 
amount,  which  exerts  a  depressing  influence  upon  labor,  and 
its  extinction  is  a  first  step  toward  the  estabhshmeut  of  con- 
fidence and  contentment.  It  is  for  such  reasons  as  these  that 
we  conclude  that  the  policy  of  debt-payment  vigorously  pros- 
ecuted will  assist  rather  than  retard  industrial  development. 

Wiih  what  Hapidity  should  the  Policy  of  Debt-payment 
proceed  f 

It  is  not  difficult  to  determine  the  principle  upon  which  an 
answer  to  this  question  rests.  The  course  of  reasoning  to 
which  the  decision  of  the  financier  should  conform  is  quite 
analogous  to  that  already  considered  in  connection  with  the 
feasibility  of  creating  a  public  debt.  As  will  be  remembered, 
the  only  defense  for  the  use  of  public  credit  as  a  source  of 
revenue  is  that,  in  this  manner,  excessive  taxes  may  be  avoided ; 
so  with  regard  to  the  expungement  of  obligations,  a  policy 
of  debt-payment  should  not  be  set  on  foot  until  all  injurious 
taxes  shall  have  been  repealed,  nor  proceed  so  rapidly  as  to 
demand  a  high  rate  of  taxation.  This  rule  is  so  simple  that 
its  mere  statement  must  gain  for  it  general  approval,  but,  as 
is  usually  the  case  with  practical  questions,  the  real  difficulty 
lies  in  its  application.  It  is  a  very  delicate  task  to  determine 
just  at  what  point  the  benefits  which  arise  from  the  expunge- 
ment of  a  debt  overbalance  the  inconvenience  attending  the 
taxes  rendered  necessary  by  the  continuance  of  the  policy. 
How  may  one  attach  a  practical  working  interpretation  to 
the  phrase  "  injurious  taxes  "  ?  "What  is  the  evidence  of  ex- 
cessive demands  for  public  purposes  ? 


24:8  NATIONAL  DEFICIT  FINANCIERING. 

There  is  no  inconsistency  in  admitting  the  possibility  of 
excessive  taxation  for  the  extinction  of  a  debt,  and  in  holding 
at  the  same  time  that  the  process  of  debt-payment  can  not 
injuriously  afEect  a  people's  industries.  The  one  statement 
refers  to  the  fact,  the  other  to  the  process  of  payment.  Our 
former  argument  proceeded  as  though  the  destruction  of 
capital  was  the  only  contingency  against  which  the  financier 
should  be  on  his  guard,  but  such  an  assumption  is  incorrect. 
Capital  is  neither  the  only  element  nor  the  most  import^t 
element  to  be  held  in  view.  It  is  a  dead  thing,  and  its  pos- 
session goes  no  further  than  to  show  the  possibility  of  indus- 
trial development.  It  is  this  fact  which  the  financier  should 
always  hold  in  mind,  and  he  should  ever  be  on  his  guard 
against  destroying  the  motive  for  applying  capital.  The 
chief  mainspring  of  activity  in  industrial  life  is  the  hope  of 
profit.  Without  the  possibility  of  personal  gain,  our  highly- 
developed  industrial  structure  would  be  thrown  to  the 
ground.  If  this  cardinal  truth  be  firmly  grasped,  there  will 
be  little  diflBculty  in  properly  interpreting  the  expression 
"  injurious  taxes." 

It  appears,  then,  that  the  rate  of  taxation  should  at  no 
time  be  so  excessive  as  to  act  like  a  dead  weight  on  the  spirit 
of  enterprise.  It  would  be  suicidal  for  a  government  to 
push  a  policy  of  debt-payment  with  such  vigor  as  to  curtail 
in  any  marked  degree  the  hope  of  personal  gain,  since  in 
this  manner  it  would  destroy  the  fund  out  of  which  alone 
payment  can  be  made.  It  is  true  that  there  is  always  a  ten- 
dency in  progressive  societies  for  the  rate  of  profit  to  fall, 
and  that  each  succeeding  generation  will  save  and  apply  capi- 
tal for  a  lower  percentage  return  than  the  one  which  preceded 
it ;  but  it  is  also  true  that  in  every  community  at  a  given 
time  there  is  a  normal  rate  below  which,  if  profits  fall,  in- 
dustries can  not  be  maintained.  It  is  the  part  of  wise  legisla- 
tion to  discover  this  limit,  and  to  avoid  any  policy  that  will 
tend  to  force  usual  profits  below  it.  This,  then,  is  the  an- 
swer to  the  question  respecting  the  rapidity  at  which  a  pub- 
lic debt  should  be  extinguished.     Its  expungement  should 


PAYMENT   OF  PUBLIC  DEBTS.  249 

not  proceed  so  rapidly  that  the  taxes  imposed  will  reduce 
profits  below  the  normal  working  minimum. 

But  the  practical  question  still  remains.  What  is  the  rate 
of  profit  in  the  United  States  that  sets  a  limit  to  the  rapidity 
with  which  a  public  debt  may  be  paid?  For  an  appropriate 
reply  to  this  question  we  must  depend  in  large  measure  upon 
the  past  experience  of  the  government,  and  to  this  end  a 
rapid  review  of  the  management  of  the  debt  since  the  late 
war  will  be  of  direct  assistance. 

The  interest-bearing  obligations  of  the  United  States 
stood  at  their  maximum  in  August,  1865,  amounting  at  that 
date  to  $2,381,000,000.  If  with  this  amount  we  compare 
the  corresponding  debt  of  January,  1887,  it  appears  that  ob- 
ligations to  the  extent  of  $1,252,000,000  have  been  extin- 
guished, thus  showing  an  annual  rate  of  decrease  of  $58,000,- 
000.  This  does  not,  however,  adequately  represent  the  ra- 
pidity with  which  the  policy  of  debt-payment  has  been  car- 
ried on.  The  redemption  of  debt  for  the  single  year  ending 
June,  1882,  amounted  to  $166,000,000,  being  $121,000,000  in 
excess  of  the  demands  of  the  sinking  fund.  The  average 
as  above  given  is  greatly  reduced  by  the  treasury  operations 
of  the  years  1877  and  1878,  which  were  addressed  to  prepa- 
ration for  the  resumption  of  specie  payments ;  for,  in  order 
to  secure  an  adequate  amount  of  specie  to  insure  the  success 
of  that  measure,  it  was  found  necessary  to  increase,  tempora- 
rily, the  total  of  bonded  indebtedness.  But  this  measure 
itself  should  be  regarded  as  a  step  in  the  reduction  of  the 
national  debt,  for  by  an  accumulation  of  specie  reserve  the 
legal-tender  notes  were  practically  paid,  while  the  amount 
outstanding  has  been  reduced  from  $128,000,000,  in  1865,  to 
$346,000,000,  in  1887.  In  addition  to  these  transactions, 
also,  $26,000,000  of  fractional  currency  has  been  withdravm, 
and  its  place  filled  with  metallic  currency.  All  these  opera- 
tions must  be  taken  into  the  account  to  properly  represent 
the  extent  of  the  payment  of  public  obligations  since  the 
close  of  the  war. 

Possibly  these  results  of  fiscal  administration  may  be  more 


250  NATIONAL  DEFICIT  FINANCIERING. 

easily  grasped  if  reduced  to  a  per  capita  basis.  In  1865  the 
per  capita  debt  of  the  United  States,  that  is  the  total  debt 
less  cash  in  the  treasury,  was  $78.25  ;  in  1880  it  amounted 
to  $37.74 ;  at  the  present  time  it  is  $28.80.  In  1865  the  per 
capita  interest  annually  charged  on  account  of  the  debt  was 
$4.29  ;  in  1880  it  had  fallen  to  $1.56  ;  at  the  present  time  it 
is  less  than  $0.90. 

When  by  the  side  of  such  a  record  of  debt-payment  we 
place  the  general  material  prosperity  of  this  country  sipce 
1865,  there  is  a  strong  presumption,  to  say  the  least,  that  the 
rate  of  payment  has  not  rendered  necessary  excessive  taxation 
nor  forced  profits  below  the  working  minimum.  The  paying 
capacity  of  the  American  people  is  enormous.  The  expunge- 
ment of  the  total  interest-bearing  debt  would  require  but  13 
per  cent  of  the  annual  gross  product  of  the  country.  Were 
it  for  any  reason  necessary,  the  people  of  the  United  States 
could  easily  support  an  annual  debt-payment  of  $200,000,000, 
which  would  be  a  sum  equal  to  2  per  cent  of  the  annual  prod- 
uct, or  about  one  quarter  of  the  total  public  expenditure  for 
Federal,  State,  and  local  purposes.  It  seems,  then,  that  the 
current  demands  of  the  sinking-fund,  which  approximate  $50,- 
000,000  for  each  year,  is  not  excessive,  and  can  have  no  ten- 
dency to  check  the  prosperity  of  the  people. 

This  question  may  be  approached  from  another  point  of 
view.  Profit,  stripped  of  its  technical  meaning,  implies  the 
excess  of  what  is  produced  over  the  cost  of  its  production. 
The  rate  of  national  profit,  therefore,  upon  a  year's  industr}'' 
will  be  represented  by  the  increased  valuation  of  real  and 
personal  property.  Accepting  this  idea  as  the  basis  of  com- 
putation, we  find  the  average  rate  of  profit  in  the  United 
States  for  years  of  peace  to  vary  from  7  to  8*5  per  cent. 
From  calculations  upon  the  basis  of  7  per  cent  as  normal  profit 
in  the  United  States,  it  may  be  discovered  that  the  annual 
payment  of  $50,000,000  to  the  sinking-fund  imposes  a  reduc- 
tion in  the  rate  of  business  profits  of  but  seven  tenths  of  a 
mill.  As  compared,  then,  with  the  actual  profits,  the  margin 
of  variation  imposed  by  the  policy  of  debt-payment  is  so 


PAYMENT  OF  PUBLIC  DEBTS.  251 

slight  that  we  can  not  regard  it  of  much  importance.  It  will 
not  deter  men  from  undertaking  new  business  enterprises. 
Or,  if  we  compare  the  rate  of  profit  enjoyed  in  this  country, 
notwithstanding  the  taxes  for  debt-payment,  with  the  rates 
in  those  countries  to  which  capital  and  labor  might  emigrate, 
we  must  conclude  that  a  wide  margin  remains  before  profits 
will  be  reduced  below  the  working  minimum.  But  I  do  not 
wish  to  be  held  too  closely  to  the  exact  accuracy  of  these 
calculations. 

Concerning  the  hest  Method  for  i^aying  Piiblio  Debts. 

Assuming,  then,  that  public  obligations  should  be  paid  as 
rapidly  as  the  industrial  condition  of  a  people  will  allow,  we 
are  led  next  to  inquire  respecting  the  most  appropriate  method 
of  procedure.  It  seems  needless  to  enter  upon  an  extended 
consideration  of  the  principles  underlying  the  old  sinking- 
fund  payments.  Those  calculations  of  Dr.  Price,  which  were 
embodied  in  fiscal  legislation  by  Mr.  Pitt,  and  afterward  shown 
to  be  wholly  fallacious  by  Professor  Hamilton,  are  familiar  to 
all  who  have  given  the  slightest  attention  to  financial  subjects ; 
nor  should  I  refer  to  them  at  this  time,  were  it  not  that  they 
are  intimately  conected  with  the  question  of  terminable  and 
life  annuities  as  a  means  of  extinguishing  a  public  debt. 
Such  a  connection  was  recognized  by  Dr.  Price  himself.  It 
is  sometimes  erroneously  supposed  that  this  close  student  of 
"  political  arithmetic  "  looked  with  favor  upon  a  pubHc  debt, 
and  that  he  invented  the  scheme  of  sinking-funds  in  order  to 
trick  the  people  into  maintaining  public  obligations.  Nothing 
could  be  further  from  the  truth.  His  remarkable  essay  upon 
"  Public  Credit  and  National  Debts"  is  introduced  by  language 
which  severely  deprecates  the  growth  of  such  incumbrances. 
After  speaking  of  the  rise  of  debt  since  the  Revolution,  he 
says : 

One  can  not  reflect  on  this  without  terror.  No  resources 
can  be  suflicient  to  support  a  kingdom  long  in  such  a  course. 
'Tis  obvious  that  the  consequence  of  accumulating  debts  so 
rapidly,  and  of  mortgaging  posterity,  and  funding  for  eternity, 


252  NATIONAL  DEFICIT  FINANCIERING. 

in  order  to  pay  the  interest  on  them,  must,  in  the  end,  prove 
destructive.  Rather  than  go  on  in  this  way,  it  is  absolutely 
necessary  that  no  money  should  be  borrowed,  except  on  an- 
nuities, which  are  to  terminate  within  a  given  period.^ 

But  the  essayist  does  not  grant  an  unqualified  approval  to 
terminable  annuities. 

I  am  [he  adds]  far  from  intending  to  recommend  this  plan 
as  the  best  a  state  can  pursue.  There  is  another  method  of 
gaining  the  same  end,  which  is,  on  many  accounts,  preferable 
to  it.  I  mean  "by  providing  an  annual  saving,  to  be  app^ed 
invariably,  together  with  the  interest  of  all  the  sums  redeemed 
by  it,  to  the  purpose  of  discharging  the  public  debts  :  Or,  in 
other  words,  by  the  establishment  of  a  permanent  sinking- 
fund."  ^ 

"What,  then,  is  a  sinking-fund  as  understood  by  Dr.  Price 
and  established  by  Mr.  Pitt  ?  This  piece  of  fiscal  machinery 
consisted  in  the  annual  appropriation  of  a  certain  sum  of 
money  to  the  purchase  of  public  stocks  at  their  current  price, 
and  the  application  of  the  interest  accruing  upon  stock  so 
purchased  to  yet  further  increase  the  operations  of  the  fund. 
If  only  these  two  appropriations  be  maintained,  a  debt  of 
any  magnitude  is  sure  to  be  discharged.  The  original  pay- 
ment may  in  the  first  instance  be  small,  but  since  all  moneys 
applied  to  the  purchase  of  stock  accumulates  at  compound 
interest  after  that  purchase,  it  will  in  time  amount  to  any 
conceivable  figure.  As  Professor  Hamilton  remarks,  "the 
work  is  written  in  a  very  intemperate  style."  The  efficacy 
of  the  fund  was  made  to  rest  upon  the  inviolability  of  the 
annual  ajypropriations,^  and  it  was  regarded  as  essential  that 
the  annual  purchases  should  be  continued,  even  though  it  be- 
came necessary  to  borrow  money  for  that  purpose  at  a  higher 

1  "  Observations  on  Revisionary  Payments,"  by  Richard  Price,  D.  D.,  F.  R.  S., 
vol.  i,  pp.  273,  274. 

2  Ibid.,  p.  276. 

'  "  What  has  been  said,  has  all  along  supposed  a  sacred  and  inviolable  appli- 
cation of  the  fund  I  have  described,  and  of  all  its  earnings,  to  the  purpose  of 
sinking  the  national  debt.  The  whole  effect  of  it  depends  on  its  being  allowed 
to  operate,  without  intersuptiok,  a  proper  time." — P.  295. 


PAYMENT  OF  PUBLIC  DEBTS.  253 

rate  of  interest  than  that  borne  by  the  funds  redeemed.^  It 
was  conceived  that  war  would  increase  the  efficiency  of  the 
fund,  because,  the  rate  of  interest  being  high,  the  fund  was 
at  that  time  making  the  quickest  progress.  Kor  did  Dr. 
Price  regard  the  conversion  of  debt  into  bonds  bearing  a  low 
rate  of  interest  as  desirable,  should  the  amount  saved  be  ap- 
plied to  the  remission  of  taxes  rather  than  to  the  increase  of 
the  sinking-fund  appropriations.'^ 

The  germ  of  truth  contained  in  this  curious  essay  is,  that 
an  annual  appropriation,  however  small,  will  in  time  pay  a 
debt  of  any  magnitude ;  and,  provided  sums  equal  to  the  in- 
terest upon  the  debt  extinguished  be  also  devoted  to  debt- 
payment,  the  expungement  will  proceed  with  continually  ac- 
celerating rapidity.  But  it  should  be  held  in  mind  that  all 
appropriations  must  be  from  clear  revenue,  or  the  new  debt 
created  in  order  that  payments  may  continue  will  equal  the 
debt  expunged.  A  thousand  calculations  could  not  bring 
this  truth  into  clearer  light  than  its  simple  statement.  The 
reasoning  of  Dr.  Price  proceeded  upon  the  erroneous  theory 
that  when  a  government  buys  its  own  stocks  it  purchases  a 

'  "  It  is  an  observation  that  deserves  particular  attention  here,  that  on  this 
plan  it  will  be  of  less  importance  to  a  state  what  interest  it  is  obliged  to  give  for 
money ;  for,  the  higher  the  interest,  the  sooner  will  such  a  fund  pay  off  the 
principal."— Pp.  277,  278. 

"  For  by  employing  the  siUKiXG-FrsD  in  bearing  current  expenses,  rather 
than  borrowing  new  money  on  new  funds,  the  state,  in  order  to  avoid  giving 
simple  interest  for  money,  is  made  to  alienate  money,  that  must  have  otherwise 
improved  at  compound  interest ;  and  which,  in  time,  would  have  necessarily  in- 
creased to  any  sum." — P.  297. 

"  Money  in  a  sinling-fund,  if  never  alienated,  is  improved  at  compound  in- 
terest; but  when  procured  by  a  loan,  bears  only  simple  interest." — P.  314. 

"  The  general  idea  of  converting  the  three  per  cents  into  a  fund  bearing  a 
higher  rate  of  interest,  with  a  view  to  facilitate  redemption,  you  have  on  many 
occasions  suggested." — From  a  letter  of  January  8,  1786,  from  Mr.  Pitt  to  Dr. 
Price,  in  which  he  asks  for  suggestions  respecting  his  proposed  sinking-fund. 

"  "  It  follows  from  hence  that  reductions  of  interest  would,  on  this  plan,  be 
no  great  advantage  to  the  state.  They  would  indeed  lighten  its  present  burdens  ; 
but  this  advantage  would  be  in  some  measure  balanced  by  the  addition  which 
would  be  made  to  its  future  burdens,  in  consequence  of  the  longer  time  during 
which  it  would  be  necessary  to  bear  them." — P.  279. 


264:  NATIONAL  DEFICIT  FINANCIERING. 

productive  property.  He  could  not  otherwise  have  spoken 
of  the  "  earnings  "  of  the  fund.  But  that  can  not  be  regarded 
as  a  productive  property  to  the  government  which  rests  upon 
taxes  levied  and  collected  by  the  government.  It  is  the 
taxes  that  are  the  source  of  revenue  and  not  the  fund.  It 
must  also  be  regarded  as  a  mistake  to  sj)eak  of  borrowing 
money  at  simple  and  investing  it  at  compound  interest  when 
a  government  borrows  money  to  buy  its  own  stock.  For  a 
given  amount  of  clear  revenue  devoted  to  the  service  of  the 
debt,  a  country  will  not  emerge  from  its  indebtedness  any 
the  quicker  because  of  such  an  arrangement.  It  seems  that 
Dr.  Price,  being  an  adept  at  political  arithmetic,  was  led 
astray  by  his  computations  in  compound  interest.^  He  did 
not  recognize  that  the  source  of  all  interest  is  current  product, 
and  that  "  earnings  "  is  a  word  which  can  only  apply  to  an 
established  business.  Kor  did  he  see,  any  more  clearly  than 
many  of  his  critics  have  seen,  that  compound  interest  is 
merely  a  calculation,  and  finds  no  corresponding  fact  in  the 
order  of  production. 

The  theory  of  maintaining  an  inviolable  sinking-fund  was 
formally  abandoned  by  English  statesmen  in  1829,  by  an  act 
which  declared  that  only  surplus  revenue  should  be  applied 
to  the  reduction  of  the  public  debt.  One  can  not,  however, 
say  that  false  views  of  debt-payment  disappeared  with  the 
enactment  of  this  rule,  for  the  j)olicy  of  converting  public 
stock  into  terminable  annuities  as  a  means  of  debt-extinction 
still  prevails.  This  policy  was  introduced  in  1808,  by  the 
Eight  Honorable  Spencer  Perceval,  at  a  time  when  the  prin- 
ciples of  Mr.  Pitt's  sinking  fund  of  1776  were  in  full  favor. 

*  The  supplement  to  this  essay  concludes  with  saying :  "  One  penny  put 
out  at  our  Saviour's  birth  to  five  per  cent  compound  interest  would,  in  the  year 
1791,  have  increased  to  a  greater  sum  than  would  be  contained  in  three 
HUNDRED  MILLIONS  of  earths,  all  solid  gold.  But,  if  put  out  to  simple  interest, 
it  would  in  the  same  time  have  amounted  to  no  more  than  seven  shillings 
AND  SIX  PENCE.  All  governments  that  alienate  funds  destined  for  re-imburse- 
ment,  choose  to  improve  money  in  the  last  rather  than  the  first  of  these  ways." 
—Pp.  314,  315. 

2  10  Geo.  IV,  ch.  27. 


PAYMENT  OF  TtlBLIC  DEBTS.  255 

It  provided  for  an  exchange  of  three-per-cent  stock  into 
equivalent  annuities  for  the  life  of  the  holder,  and  was  re- 
garded by  its  projector,  as  indeed  it  was  in  reality,  as  an  an- 
cillary part  of  the  sinking-fund  administration. 

But,  though  thus  connected,  the  policy  did  not  share  the 
fate  of  the  old  sinking-fund,  for,  in  1829,  parliament  re- 
affirmed its  confidence  in  terminable  annuities  by  the  passage 
of  an  elaborate  act  for  their  creation.  It  was  thought  that 
adequate  provision  had  in  this  manner  been  made  for  the 
discharge  of  public  obligations,  and  subsequent  legislation 
declares  that  English  opinion  has  not  retreated  from  the  po- 
sition then  assumed. 

The  theory  according  to  which  an  annuity  is  drawn  is 
not  difficult  to  understand.  It  is  in  form  a  promise  to  pay, 
let  us  say  annually,  a  definite  sum  of  money  for  a  specified 
length  of  time.  If  the  annuity  be  "  certain,"  the  year  at 
which  payment  shall  cease  is  stated  in  the  contract ;  if  it  be 
a  life  annuity,  the  payment  continues  until  the  death  of  the 
annuitant. 

The  theory  of  the  annuity  certain  is  a  simple  api^lication  of 
algebra  to  the  fundamental  idea  of  compound  interest.  Ac- 
cording to  this  idea,  any  sum  of  money  invested,  or  put  at 
interest,  is  increased  at  the  end  of  the  year  by  the  addition  to 
it  of  interest  at  a  certain  rate  ;  and,  at  the  end  of  the  second 
year,  the  interest  of  the  first  as  well  as  the  original  sum  is  in- 
creased in  the  same  proportion,  and  so  on  to  the  end  of  the  last 
year — the  interest  being,  in  technical  language,  converted  into 
principal  yearly.^ 

In  the  case  of  terminable  annuities,  it  is  conceived  that 
the  annual  payment  computed  on  the  sum  of  money  origi- 
nally borrowed  exceeds  the  amount  of  simple  interest  at  the 
ordinary  rate,  and  this  excess  is  charged  to  the  reimburse- 
ment of  the  principal.  It  is  this  excess  payment  upon  which 
compound  interest  is  computed,  and  when,  being  compounded 
at  the  ordinary  rate  of  interest,  it  amounts  to  the  principal 
originally  bori'owed,  the  debt  is  said  to  be  discharged.    Thus 

*  10  Geo.  IV,  ch.  24.  *  "  Encyclopaedia  Britannica,"  ninth  edition. 


256  NATIONAL  DEFICIT  FINANCIERING. 

the  date  at  which  the  annuity  falls  in  is  determined  by  the 
rapidity  at  which  the  excess  payment  accumulates  ;  and  this, 
for  any  given  payment,  varies  directly  as  the  rate  at  which 
it  is  calculated.  Thus,  a  perpetual  annuity,  when  Interest 
is  5  per  cent,  is  said  to  be  worth  twenty  years'  purchase, 
or  an  amount  equal  to  twenty  times  any  single  payment. 
The  price  for  one  hundred  years  is  nineteen  and  eight-tenths 
years'  purchase,  and  for  any  number  of  years  less  than  one 
hundred  it  is  worth  whatever  sum,  at  the  accepted  rat^e  of 
computation,  the  annual  payment  will  amount  to.  At  4  per 
cent,  the  value  of  a  perpetual  annuity  is  twenty-five  years' 
purchase ;  at  3  per  cent,  it  is  thirty-three  and  one  third  years' 
purchase. 

It  seems,  then,  easy  to  understand  how  a  debt  may  be 
discharged  by  converting  stock  into  terminable  annuities. 
Holders  of  stock  will  lose  nothing  provided  only  the  annual 
payment  on  account  of  the  debt  be  increased  beyond  the  sum 
accruing  at  simple  interest.  Upon  the  plan  of  a  sinking- 
fund,  this  surplus  revenue  would  be  accumulated  in  the  hands 
of  commissioners  until  it  had  absorbed  the  entire  debt ;  ac- 
cording to  the  annuity  plan,  the  accumulation  is  calculated 
and  the  amounts  are  paid  directly  to  the  creditor  in  install- 
ments. Setting  aside  the  question  of  expense  and  the  dan- 
ger of  miscalculations,  a  given  surplus,  inviolably  maintainetl, 
will  discharge  a  given  debt  with  equal  rapidity  in  v/hich- 
ever  way  it  be  applied. 

"Wherein,  then,  lies  the  difference  between  terminable 
annuities  and  sinking-funds  as  a  means  of  discharging  a  debt  ? 
This  difference  pertains  wholly  to  the  form  of  the  contract. 
In  case  of  annuities,  the  parties  to  the  contract  are  the  gov- 
ernment on  the  one  hand,  and  public  creditors  on  the  other, 
from  whicli  it  follows  that  a  failure  to  make  payment  as 
promised  would  be  confession  of  public  bankruptcy  ;  in  case 
of  a  sinking-fund,  however,  the  promise  of  payment  is  from 
the  government  as  a  whole  to  the  Sinking-Fund  Commission- 
ers, who  are  themselves  officers  of  the  government ;  and 
should  the  appropriations  to  the  service  of  the  debt  be  used 


PAYMENT  OF  PUBLIC  DEBTS.  257 

in  some  other  manner,  there  is  no  one  to  make  complaint. 
The  failure  of  sinking-funds  to  extinguish  debt  is  due  to  the 
fact  that  governments  continually  borrow  from  the  fund  to 
meet  pressing  emergencies,  which  means  that  moneys  appro- 
priated to  the  service  of  debt  are  diverted  to  other  purposes. 
But  by  the  arrangement  of  an  annuity  no  such  borrowing  is 
possible.  The  annual  payment  on  account  of  principal  forms 
part  of  the  contract.  I^ew  demands  must  be  met  by  new 
taxes  or  by  fresh  loans  upon  the  market.  It  is,  then,  cor- 
rect to  conclude  that  terminable  annuities  are  merely  a  me- 
chanical contrivance  for  the  purpose  of  rendering  the  prin- 
ciple of  the  sinking-fund  automatic  in  its  action.  They  can 
not,  therefore,  meet  the  approval  of  sound  finance,  for  they 
involve  the  error  of  proceeding  at  all  hazards  with  the  pay- 
ment of  one  debt,  even  while  another  is  being  contracted. 

But  if  annuities  are  merely  disguised  sinking-funds,  why 
have  English  financiers  maintained  them  as  a  means  of  debt- 
payment  ?  There  seem  to  have  been  two  reasons  for  this. 
The  English  debt  was  originally  issued  at  discount,  but  has 
since  gradually  and  persistently  risen  in  price.  Under  such 
conditions  the  conversion  of  discount-stock  into  terminable 
annuities  permits  the  government  to  reap  the  advantage  of 
expunging  its  stock  at  the  price  which  ruled  when  the  con- 
version took  place.  This  was  Mr.  Perceval's  idea,  whose 
scheme  of  1808  has  been  referred  to,  and  his  reasoning  is 
tenable,  provided  the  conversion  takes  place  at  the  natural 
ratio  between  stock    and  annuities.^     For  purpose  of  illus- 

^  "  The  committee  must  be  perfectly  aware,"  said  Mr.  Perceval,  "  that  the 
operation  of  the  sinking-fund  has  recently  very  much  increased  the  price  of 
stocks.  There  is  every  reason  to  believe  that  by  the  continuance  of  that  opera- 
tion they  will  still  further  be  increased  in  price.  No  one  can  doubt.  Sir,  that  if 
the  measure  were  consistent  with  public  faith,  it  would  be  extremely  desirable 
to  give  to  the  nation  an  opportunity  of  redeeming  the  whole  of  the  national 
debt  at  the  price  of  the  stock,  because  that  would  preclude  the  effect  which  any 
further  advance  in  the  price  of  the  stocks  must  have  in  retarding  the  operation 
of  the  sinking-fund.  There  are  two  objects  which  the  sinking-fund  has  in  view, 
the  one  to  provide  for  the  final  redemption  of  the  national  debt,  the  other  to 
keep  up  the  price  of  stocks  in  the  market,  so  as  to  enable  government,  wheU' 


258  NATIONAL  DEFICIT  FINANCIERING. 

tration,  suppose  three-per-cent  stock  quoted  at  60  per  cent  of 
its  par  value.  This  would  show  a  $1,000  bond  to  be  worth 
$600,  and  the  ruling  rate  for  money  5  per  cent.  Suppose, 
also,  the  government  to  convert  this  stock  into  a  terminable 
annuity,  by  raising  the  annual  payment  from  $30  to  $60. 
One  half  of  this  payment  will  be  charged  to  the  payment  of 
the  interest,  the  other  half  to  the  extinction  of  the  debt,  and 
must  continue  until  at  5  per  cent  compound  interest  it  accu- 
mulate the  sum  of  $600.  That  is  to  say,  it  must  continue  be- 
tween fourteen  and  fifteen  years.  Suppose,  in  the  third  place, 
that,  at  the  time  the  annuity  falls  in,  three-per-cent  stock  is 
quoted  at  80  instead  of  60,  is  it  not  plain  that  the  govern- 
ment has  saved  the  difference  by  entering  into  a  contract  to 
expunge  its  obligations  when  they  stood  at  the  lower  figure  ? 
Had  this  annual  payment  of  $30  been  accumulated  in  a 
sinking-fund,  the  extinction  of  the  original  debt  would  have 
required  its  continuance  until  $800'  had  been  accumulated. 
If  a  government,  then,  is  so  unfortunate  as  to  have  incurred 
its  debt  at  discount,  and  is  able  to  convert  stock  into  termi- 
nable annuities  at  its  arithmetic  value,  there  is  adequate 
apology  for  such  an  operation. 

But  can  a  government  reasonably  expect  conversion  to 
take  place  at  the  arithmetic  ratio  between  stock  and  annu- 
ities ?  If  the  annuities  created  be  for  the  life  of  the  holder, 
it  is  probable  that  the  conversion  of  a  limited  amount  will 
take  place  at  figures  which  do  not  entail  loss  to  the  public  ; 
for  there  is  always  a  small  class  of  persons  to  whom  invest- 
ments that  give  a  sure  income  during  life  are  very  attractive. 

ever  the  exigencies  of  the  state  may  require  it,  to  make  an  advantageous  loan 
for  the  public.  These  objects,  however.  Sir,  are  in  some  degree  inconsistent. 
In  some  degree  they  counteract  each  other.  Whatever  measure  raises  the  funds, 
and  thus  enables  government  to  borrow  on  the  best  terms,  prevents  the  Com- 
missioners for  the  Reduction  of  the  National  Debt  from  reducing  that  debt  on 
the  best  terms.  Now,  Sir,  the  measure  which  I  propose  will  combine  both  of 
these  objects ;  it  will  naturally  tend  to  increase  the  price  of  stocks,  and  it  will, 
at  the  same  time,  secure  the  redemption,  at  a  low  price,  of  so  much  stock  as 
may  be  transferred  antecedent  to  the  rise  produced."  (As  quoted  by  Mr.  Hen- 
dricks in  "  Journal  of  the  Statistical  Society  of  London  "  for  1856.) 


PAYMENT  OF   PUBLIC  DEBTS.  259 

But  even  with  this  class  there  is  a  danger  of  miscalculation 
if  the  government  make  use  of  ordinary  life-tables ;  for  those 
to  whom  life-annuities  are  most  attractive,  being  persons  who 
desire  to  avoid  the  care  and  worry  of  ordinary  pursuits,  will 
prove  unfortunate  exceptions  to  the  usual  rule  of  vital  statis- 
tics. But  the  amount  of  annuities  that  can  be  thus  absorbed 
is  limited,  and  if  the  government  issue  such  a  quantity  as  to 
force  it  into  the  hands  of  speculators,  it  can  not  expect  satis- 
factory terms  of  conversion.  It  was  a  mistake  on  the  part  of 
Mr.  Perceval  to  endeavor  to  throw  such  a  large  part  of  the  pub- 
lic debt  into  the  form  of  life-annuities.  Not  only  did  the  gov- 
ernment sustain  serious  loss  by  reason  of  the  errors  in  the  life- 
tables  employed,  as  was  declared  by  an  investigating  commit- 
tee in  1828,  but  the  large  number  of  life-annuities  created 
depressed  their  price.  We  can  not  then  regard  the  conver- 
sion of  discount  stock  into  life-annuities  as  desirable  for  any 
considerable  amount  of  debt.  There  is  more  to  be  said  for 
the  plan  if  the  annuities  employed  are  simple  tenninable  an- 
nuities, but  in  this  case  the  advantage  reaped  is  not  as  great 
as  one  might  expect ;  for  one  who  takes  an  annuity  as  a  busi- 
ness investment  will  consider  the  repayment  of  the  principal 
of  the  debt,  and  will  demand  such  an  amount  in  payment  as 
will  balance  the  probable  future  rise  in  the  stock  rehnquished. 
But  parliament  did  not  in  1828  abandon  the  policy  of  life- 
annuities.  The  scheme  introduced  by  Mr.  Goulburn,  which 
became  law  the  following  year,  conformed  in  its  main  feat- 
ures to  the  law  of  1808  ;  the  table  of  vital  statistics,  however, 
upon  which  it  was  based,  was  radically  modified.  Mr. 
Goulburn  stated : 

That  his  only  object  was  to  extend  the  principle  laid  down 
in  the  former  act,  repealed  in  the  preceding  session,  and  to  es- 
tablish a  more  accurate  basis  for  calculating  the  value  of  annui- 
ties, in  order  to  combine  with  the  greatest  possible  convenience 
to  that  part  of  the  public  interested  in  the  purchase  of  annuities 
security  against  loss  on  the  part  of  those  who  granted  them. 

"We  are  not  at  present  concerned  with  learning  the  de- 
gree of  success  which  attended  the  new  estimates ;  but  it  is 


260  NATIONAL  DEFICIT  FINANCIERING. 

interesting  to  notice  how  the  government,  in  its  subsequent 
administration  of  the  policy  of  paying  a  public  debt  through 
annuities,  has  been  obliged  to  resort  to  unusual  measures  for 
the  purpose  of  inducing  holders  of  stock  to  submit  to  con- 
version. A  number  of  acts  have  been  passed  for  the  pur- 
pose of  bringing  savings  banks  and  provident  societies  "  into 
immediate  connection  with  the  National  Debt  Office  as  feed- 
ers to  the  plan  of  deferred  and  immediate  annuities,"  and  re- 
sort has  also  been  had  to  the  questionable  measure  of  pit)vid- 
ing  for  public  life  insurance  as  a  means  of  assisting  the  finan- 
cial policy  of  the  government.' 

A  second  reason  why  England  has  favored  annuities  as  a 
means  of  debt-payment  is  found  in  the  influence  of  an  er- 
roneous principle  of  political  economy.  The  impression  is 
left  by  many  writers  that  the  supremacy  of  Mr.  Pitt's  views 
respecting  the  sufficiency  of  a  sinking-fund  is  responsible 
for  the  permanency  of  the  English  debt.  This  does  not  ap- 
pear to  be  true.  The  English  debt  has  not  been  paid  be- 
cause the  mercantile  classes  conceive  their  immediate  inter. 
ests  to  be  against  it.  They  believe  that  taxes  remitted  "  will 
surely  fructify  in  the  pockets  of  the  people,"  and  it  has  been 
impossible  for  the  government  to  maintain  a  surplus  fund  in 
the  face  of  such  a  sentiment.  One  of  the  reasons  why  Mr. 
Sargant'  defends  sinking-funds  is  that  appropriations  may 
be  maintained  in  this  manner  when  it  would  be  impossible 
to  accomphsh  such  a  result  with  open  payments,  though  how 
he  can  hold  such  an  opinion,  in  view  of  the  history  of  past 
funds,  it  is  difficult  to  understand.  This,  however,  is  the  de- 
fense of  terminable  annuities.  In  1855,  Sir  G.  C.  Lewis  at- 
tempted to  create  a  sinking-fund.  The  plan  was  opposed  by 
Mr.  Gladstone,  who  had  no  confidence  in  the  ability  of  the 
chancellor  to  maintain  such  a  fund. 

1  Compare  Acts:  3  "William  IV,  ch.  141 ;  Y  and  8  Victoria,  ch.  83 ;  16  and 
17  Victoria,  ch.  45.  For  a  critical  examination  of  government  life-annuities 
from  1808  to  1855,  the  student  is  referred  to  an  excellent  article  by  Frederick 
Hendricks,  Esq.,  in  the  "Journal  of  the  Statistical  Society  of  London,"  1856. 

-  "  Apology  for  Sinking-Funds,"  by  William  Lucas  Sargant,  1868. 


PAYMENT  OF  PUBLIC  DEBTS.  261 

"  You  may  [he  said]  snatcli  a  vote  in  its  favor,  but  you 
can  not  bind  future  parliaments.  You  will  find  that  de- 
mands for  remission  of  taxation  will  crush  your  measure." 
On  another  occasion  Mr.  Gladstone  is  said  to  have  remarked 
that  "  the  n  ation  would  not  consent  to  pay  its  debts  openly ; 
he  believed  that  the  nation  would  consent  to  pay  it  when  it 
appeared  in  the  form  of  annuities."  ^ 

It  seems,  then,  that  this  defense  of  annuities,  which  is 
the  only  argument  in  their  favor  when  stocks  have  ap- 
proached par,  is  but  a  confession  of  inability  on  the  part  of 
the  government  to  administer  the  debt  on  sound  principles ; 
but  statesmen  delude  themselves  if  they  believe  that  the 
public  is  to  be  thus  tricked  into  maintaining  adequate  pay- 
ments. The  source  of  the  evil  is  the  erroneous  principle  of 
political  economy  and  taxation  already  pointed  out,  and  until 
the  leaders  of  opinion  are  willing  to  assert  "  that  a  good  deal 
of  what  the  tax-gatherer  leaves  in  the  pockets  of  the  people 
is  simply  wasted," '  the  finances  of  the  nation  will  continue 
to  be  controlled  by  counting-house  rules.  For  the  United 
States,  the  question  of  annuities  bears  no  present  interest. 
Were  her  debt  at  par,  instead  of  being  at  high  premium,  it 
might  be  that  a  small  portion  of  it  could  be  wisely  converted 
into  terminable  life-annuities  for  the  convenience  of  de- 
pendent persons  who  have  funds  to  invest.  But,  taking 
things  as  they  are,  with  a  large  amount  of  debt  coming  down 
to  par  in  1891,  such  dt  proposal  need  not  be  seriously  consid- 
ered. 

What  has  been  the  policy  of  the  United  States  in  pro- 
viding for  the  payment  of  her  public  debt?  Should  one 
judge  by  the  language  of  those  laws  pertaining  to  this  sub- 
ject, he  might  infer  the  views  of  American  statesmen  to 
have  been  shaped  according  to  the  principles  of  "  the  good 
Dr.  Price,"  as  Franklin  was  pleased  to  call  him.  How 
far  this  impression  is  correct  is  one  of  the  disputed  points 

'  Quoted  from  Sargant,  pp.  78  and  ^9. 
*  Robert  Giffen,  "  Essays  in  Finance."    First  series,  p.  2*74. 
18 


262  NATIONAL  DEFICIT  FINANCIERING. 

of  financial  history.  Federalist  historians  have  been  quite 
strenuous  in  their  endeavors  to  show  that  the  Federalist  ad- 
ministration was  not  influenced  by  a  line  of  reasoning  that 
has  since  proved  to  be  erroneous. 

Our  sinking-fund  [says  Jonathan  Elliot,  who  has  given 
more  attention  to  the  details  of  this  subject  than  any  other 
writer]  differed  materially  from  that  which  was  adopted  in  the 
early  financial  history  of  Great  Britain,  as  it  was  not  exclu- 
sively applied  to  the  liquidation  of  a  particular  debt  in  exist- 
ence. It  was  also  unlike  that  of  Mr.  Pitt,  as  the  amount  <^f  the 
capital  appropriated  was  not  fixed  before  1802  ;  and  when  the 
amount  of  the  appropriation  was  known  the  payment  of  the 
interest  and  charges  on  the  debt  was,  in  common  with  the  prin- 
cipal, to  be  discharged  from  that  fund.  .  .  .  Properly  speaking, 
the  essential  character  of  a  sinking-fund  was  not  to  be  found 
in  the  operation  of  that  of  the  United  States.' 

This  seems  to  me  to  press  the  matter  a  little  too  far.  It 
is  certain  that  the  writings  of  Dr.  Price  were  well  known 
and  highly  appreciated  in  this  country,  for  in  1778  the  Colo- 
nial Congress  tendered  to  him  an  invitation  to  become  a  citi- 
zen of  the  United  States,  and  to  assist  in  regulating  her 
financial  affairs.  It  is  also  significant  that  Congress  com- 
mitted itself  as  early  as  1782  to  the  formation  of  a  sinking- 
fund  that  should  be  "  inviolably  appropriated  to  the  payment 
of  the  principal  of  the  said  debt,  and  shall  on  no  account  be 
diverted  to  any  other  purpose."  It  is  true  nothing  of  the 
sort  was  done,  and  it  is  probable  the  chief  purpose  of  the 
legislature  was  to  strengthen  the  arguments  of  agents  then  in 
Europe  endeavoring  to  raise  money  on  foreign  loans.  The 
first  provision  for  expunging  public  obligations,  after  the 
organization  of  the  present  Federal  government,  is  found  in 
the  last  clause  of  the  refunding  act,  which  set  aside  the  pro- 
ceeds of  public  lands  "  towards  sinking  or  discharging  the 
debts,  for  the  payment  whereof  the  United  States  are  hold- 
en."  This  is  quite  in  harmony  with  the  idea  that  prevailed 
throughout  the  revolutionary  struggle,  and  but  fulfilled  the 

'  "  The  Funding  System  of  the  United  States  and  of  Great  Britain,"  by 
Jonathan  Elliot,  1845.     Ex.  Doc,  1st  session,  28th  Congress,  p.  406,  note. 


PAYMENT  OF  PUBLIC  DEBTS.  263 

expectations  of  those  States  that  had  made  cession  of  terri- 
tory to  the  Federal  government.  v 

The  sinking-fund  was  established  bj  an  act  of  August  12, 
1790,  and  its  provisions  further  extended  by  an  act  of  May 
8,  1792.  The  President  of  the  Senate,  the  Chief  Justice, 
the  Secretary  of  State,  the  Secretary  of  the  Treasury,  and 
the  Attorney  General,  for  the  time  being,  were  appointed 
commissioners.  These  commissioners  were  empowered  to 
purchase  public  stock,  and  to  hold  it  as  trustees  of  the  gov- 
ernment, applying  the  interest  accruing  upon  such  stock  to 
further  pm^chases.  All  this  was  wholly  English.  The  money 
appropriated  to  set  this  fund  in  operation  came  from  two 
sources — the  sm-plus  of  receipts  from  tonnage  dues  to  the 
close  of  the  year  1790,  and  a  loan,  not  to  exceed  $2,000,000, 
which  the  President  was  authorized  to  make.  These  laws 
do  not  disclose  the  essential  error  of  the  sinking-fund  policy, 
for  they  do  not  demand  inviolable  jpayments.  It  is  true  that 
authority  was  granted  to  borrow  money  with  which  to  set 
the  fund  in  operation,  but  this  may,  perhaps,  be  regarded  as 
an  extension  of  the  refunding  policy,  rather  than  as  part  of 
the  policy  of  debt-payment.  Two  loans  sold  in  Holland 
were  declared  by  Congress  to  meet  the  demands  of  the  law, 
the  proceeds  of  which  were  diverted  to  pay  the  first  and 
second  installments  due  the  United  States  Bank ;  previous  to 
1795,  the  commissioners  had  received  only  $434,901  from  the 
sums  thus  borrowed.  "While,  however,  admitting  that  this 
clause  does  not  prove  Hamilton  to  have  believed  that  money 
could  be  borrowed  at  simple  and  accumulated  at  compound 
interest,  it  is  yet  a  good  illustration  of  that  confusion  which 
he  permitted  occasionally  to  creep  into  public  accounts — a 
confusion  upon  which  some  of  his  eulogists  have  placed  too 
much  reliance  in  supporting  his  claim  to  be  ranked  as  a  great 
financier. 

Provisions  for  payment  of  the  public  debt  made  under 
the  Federalist  administration  were  completed  by  an  act  of 
March  3,  1795.  According  to  this  act,  all  moneys  appro- 
priated to  the  purchase  of  public  stock  were  accumulated  in 


264:  NATIONAL  DEFICIT  FINANCIERING. 

a  fund  to  which,  for  the  first  time,  was  given  the  name  of 
"  The  Sinking-Fund."  The  composition  of  this  fund  was  as 
follows : 

1.  So  much  of  the  revenue  of  imposts  and  tonnage  as, 
together  with  moneys  abeady  at  the  disposal  of  the  com- 
missioners, may  be  necessary  to  make  an  annual  two-per-cent 
payment  upon  the  principal  of  the  six-per-cent  stock  for  which 
the  government  was,  in  1796,  liable. 

2.  Dividends  upon  bank  stock  subscribed  by  the  United 
States.  * 

3.  Sums  from  current  revenue  equal  to  the  accruing  in- 
terest upon  public  stock  previously  purchased  or  redeemed. 

4.  Net  proceeds  of  the  sale  of  public  lands. 

5.  All  moneys  received  by  the  United  States  on  account 
of  debts. 

6.  All  surplus  moneys  remaining  in  the  treasury  at  the 
close  of  any  calendar  year. 

It  is  only  necessary  to  consider  the  first  and  the  third 
items  making  up  this  fund ;  the  others  simply  appropriate 
specific  sources  of  revenue  to  a  definite  purpose.  There  can 
be  no  question  but  that  Mr.  Hamilton  intended,  by  the  first 
and  the  third  clauses  above  given,  to  create  an  inviolable 
claim  of  varying  amount  upon  current  revenue.  It  will  be 
remembered  that  the  contract  upon  which  the  six-per-cent 
stock  was  issued  prohibited  payment  at  a  rate  more  rapid 
than  eight  dollars  in  the  hundred,  for  both  principal  and  in- 
terest ;  but  by  this  law  the  payment  of  eight  dollars  was  ren- 
dered obligatory,  thus  converting  all  this  stock  into  a  twenty- 
four-year  annuity,  over  which  the  government  no  longer 
retained  any  discretion  respecting  payment.  By  the  third 
clause  the  usual  method  of  sinking-fund  calculations  was 
perpetuated,  and  this  also  in  the  mind  of  the  Secretary  con- 
stituted an  inviolable  payment.  It  was  thought  (to  borrow  a 
phrase  from  Dr.  Price)  that  the  indebtedness  of  the  country 
would  be  kept  in  a  constant  state  of  extinction.  Some  writ- 
ers seem  to  think  that  a  financier  must  formally  express  his 
confidence  in  the  efficiency  of  compound  accumulations  be- 


PAYMENT  OF  PUBLIC  DEBTS.  265 

fore  naming  liim  a  supporter  of  the  sinking-fund  theory, 
but  tHs  declares  the  ignorance  of  the  writers,  and  does  not 
excuse  the  financier.  The  error  of  this  theory  of  financier- 
ing lies  in  the  fact  that  it  provides  for  automatic  extinction 
of  a  debt.  This  leads  to  false  security,  and  renders  a  country 
liable  to  the  necessity  of  borrowing  money  at  high  rates 
while  paying  a  debt  that  bears  low  rates.  This  evil  was  in- 
corporated by  Hamilton  into  American  financiering. 

It  is  not  necessary  to  rely  upon  inference  for  this  con- 
clusion. Hamilton's  report  of  January  21,  1795,  would 
have  pleased  the  heart  of  Dr.  Price.  As  the  essay  of  the 
latter  began  with  deprecating  public  incumbrances,  so  the 
report  of  the  former  begins  with  deprecating  "  that  progress- 
ive accumulation  of  debt  which  must  ultimately  endanger 
all  government."  It  was  laid  down  as  a  "  fundamental 
maxim  ....  that  the  creation  of  debt  should  always  be  ac- 
companied with  the  means  of  extinguishment ;  this  is  the 
true  secret  for  rendering  public  credit  immortal."  It  is 
possible  to  interpret  such  an  expression  into  a  sound  rule  of 
finance.  It  is  true  that  no  debt  of  any  magnitude  should  be 
created  except  accompanied  by  a  law  imposing  taxes  ade- 
quate for  its  final  extinction.  But  in  the  present  instance 
such  an  interpretation  is  not  admissible,  for  in  the  same  re- 
port we  read,  that  sinking-fund  appropriations  "  should  be 
clothed  with  the  character  of  private  property,"  and  that  its 
application  should  be  made  "  a  part  of  the  contract  with  the 
creditors."  The  principle  enunciated  by  Hamilton  is  indeed 
a  "fundamental  maxim"  of  the  theory  of  sinking-funds, 
but  is  not  a  fundamental  maxim  in  sound  national  financier- 
ing. It  is  an  error  to  say  that  public  credit  is  dependent 
upon  maintaining  inviolable  payments ;  it  depends  rather  on 
simplicity  in  public  accounts,  and  upon  energy  on  the  part  of 
the  administration  in  the  prosecution  of  whatever  purpose 
it  undertakes. 

This  is  no  place  to  trace  in  detail  the  operations  of  the 
Federalist  sinking-fund.  The  last  purchase  of  public  stock 
was  made  in  December,  1795,  but  the  redemption  of  the  an- 


266  NATIONAL  DEFICIT  FINANCIERING. 

unities  and  the  payment  of  certain  other  debts  continued, 
although  it  was  found  necessary  to  negotiate  six  separate 
loans  previous  to  1801,  two  of  which  were  placed  at  8 
per  cent.  The  result  of  financial  operations  during  the 
twelve  years  of  Federalist  administration  was  to  increase 
rather  than  decrease  the  Federal  debt.  Upon  January  1, 
1791,  the  amount  of  outstanding  obligations  was  $75,1:63,- 
476 ;  upon  the  corresponding  date  for  1795  the  debt  had 
risen  to  $80,747,587.  While  "Walcott  was  Secretary  of  the 
Treasury,  the  operations  of  the  sinhing-fund  made  no  impres- 
sion whatever  upon  the  amount  of  indebtedness,  and  there 
was  left  by  the  Federalists  as  a  legacy  to  the  Jefferson  ad- 
ministration a  debt  of  $80,700,000.  Nothing  is  here  said 
in  criticism  of  the  fact  that  the  debt  increased.  That  may 
have  been  a  necessity  under  the  circumstances.  Nor  do  we 
undertake  to  decide  whether  this  necessity  was  due  to  ineffi- 
ciency on  the  part  of  the  Federalist  administration,  or  to  the 
carping  criticisms  of  the  Republicans  out  of  office ;  our  only 
conclusion  is,  that  it  is  unwise  to  play  at  paying  a  debt  while 
the  debt  is  in  reality  growing.  This  leads  to  false  security, 
and  becomes  a  most  prolific  source  of  new  loans. 

The  financial  ability  of  the  Kepublican  party  was  found 
in  Albert  Gallatin.  When  he  took  the  portfolio  of  the  Treas- 
ury Department,  it  was  knovm  that  his  views  respecting  the 
necessity  of  extinguishing  the  public  debt  were  of  the  most 
pronounced  character.  These  views  he  had  expressed  while 
a  member  of  Congress,  as  he  had  before  had  occasion  to  put 
them  into  practice  in  Pennsylvania,  his  adopted  State.  The 
"  payment  of  the  debt  was  the  great  dogma  of  the  demo- 
cratic principle.  '  The  discharge  of  the  debt  is  vital  to  the 
destinies  of  our  government,'  wrote  Mr.  Jefferson  to  Mr. 
Gallatin,  in  October,  1809,  when  the  latter  was  desperately 
struggling  to  maintain  his  grasp  upon  the  administration ; 
'  we  shall  never  see  another  President  and  Secretary  of  the 
Treasury  making  all  other  objects  subordinate  to  this.' "  ^ 

» Adams's  "  Life  of  Gallatin,"  p.  270. 


PAYMENT  OF  PUBLIC  DEBTS.  267 

But  did  Gallatin  believe  in  sinking-funds  ?  That  part  of 
the  law  of  1795  which  he  declared  to  meet  his  approval  is 
the  part  upon  which  we  have  relied  to  show  that  Hamilton 
was  not  entirely  free  from  the  influence  of  English  methods 
of  financiering.  In  a  letter  of  March  31, 1802,  to  the  chair- 
man of  the  Committee  of  Ways  and  Means,  he  says  :  "  Noth- 
ing more  seems  necessary  for  those  several  objects  [that  is, 
for  provision  for  the  debts]  than  to  make  for  the  debts  which 
are  intended  to  be  discharged  as  adequate  a  provision  as  is 
made  by  the  act  of  March  3,  1795,  for  the  payment  of  the 
eight-per-cent  annuity  of  the  six-per-cent  and  deferred 
stocks."  ^  This  seems  to  approve  all  that  we  have  con- 
demned, and  if  it  means  that  permanent  appropriations  for 
debt-payments  should  be  made  part  of  a  debt-contract,  it  cer- 
tainly comes  under  the  just  censure  of  sound  financiering. 
But  there  are  other  expressions  of  Gallatin's  which  forbid 
that  we  accept  this  as  his  permanent  opinion.  He  did  not 
attempt  to  sweep  away  the  sinking-fund  legislation,  because 
it  was  commonly  regarded  as  a  check  upon  the  Secretary  of 
the  Treasury,  and,  to  quote  his  own  words,  "  owing  to  the  pre- 
judices of  the  times,  the  attempt  would  have  been  represented 
as  impairing  the  plan  already  adopted  for  the  payment  of  the 
debt."  ^  He  undertook,  instead,  to  simplify  it  in  its  workings 
and  render  its  accounts  clear,  although  he  characterized  it  as 
*'the  mystifying  and  useless  machinery  with  which  Mr. 
Hamilton  had,  in  imitation  of  Mr.  Pitt's  sinking-fund,  en- 
cumbered the  very  simple  subject  of  paying  the  debt."^ 

The  sinking-fund  in  the  hands  of  the  Republican  Secre- 
tary was  resolved  into  a  permanent  appropriation  of  $7,300,- 
000  (afterward  increased  to  $8,000,000  on  account  of  the 
Louisiana  purchase),  which  was  devoted  to  the  support  of  the 
public  debt.*    This  sum,  being  largely  in  excess  of  the  de- 

'  State  Papers,  "  Finance,"  vol.  i,  p.  749. 

*  Quoted  in  Adams's  "  Life  of  Gallatin,"  p.  296. 

2 Quoted  from  a  letter  to  Gales  and  Seaton,  February  5,  1835.     "Writings 
of  Gallatin,"  ii,  p.  501. 

*  Law  of  April  29,  1802. 


268  NATIONAL  DEFICIT  FINANCIERING. 

mand  for  current  interest,  gave  a  certain  surplus  for  the  re- 
duction of  the  principal.  "When  the  war  of  1812  came  on, 
the  outstanding  principal  of  the  public  debt  had  been  reduced 
to  $45,120,304,  consisting  of  $16,723,208  of  three-per-cents, 
which  Gallatin  would  not  pay ;  $17,147,096  of  six-per-cents 
that  were  under  the  condition  of  annuity  payments;  and 
$11,250,000  of  Louisiana  stock,  no  part  of  which  could  be 
paid  before  1818.  During  the  continuance  of  the  war  there 
was  no  redemption  of  permanent  indebtedness,  except  such 
as  had  been  entailed  by  the  law  of  1795.  The  permanent 
appropriation  to  the  service  of  the  debt  was  continued,  but  it 
was  assigned  to  the  support  of  new  loans.  We  find  in  the 
financial  administration  of  this  war,  which  in  many  respects 
is  open  to  severe  censure,^  no  application  of  the  pernicious 
theory  that  every  loan  at  its  creation  should  be  accompanied 
by  the  means  of  its  own  extinction. 

There  is  disclosed  in  the  administration  of  Mr.  Gallatin 
the  true  policy  of  debt-payment.  It  consists  in  the  establish- 
ment of  a  permanent  appropriation  for  the  service  of  the 
debt  which  shall  be  in  excess  of  the  demands  of  current  in- 
terest. But  such  appropriation  need  not  be  "  inviolable."  It 
need  form  no  part  of  a  "  private  contract,"  nor  be  regarded 
as  constituting  "  private  property."  A  government  should 
always  be  at  liberty  in  time  of  emergency  to  divert  money 
held  for  the  payment  of  debt  to  the  support  of  new  loans. 
It  may  be  said  that  such  a  policy  is  dangerous,  and  that  with- 
out inviolable  payments  the  country  runs  the  risk  of  per- 
petual obligations ;  but  experience  shows  it  to  be  less  danger- 
ous than  reliance  upon  automatic  machinery  for  the  extinction 
of  obligations,  as  well  as  less  expensive,  if  we  consider  the 
varying  rates  of  interest  in  time  of  war  and  peace.  The 
United  States  is  indebted  to  Mr.  Gallatin  more  than  to  any 
other  man  for  the  establishment  of  this  policy.  Under  the 
guidance  of  his  clear  insight  this  country  departed  from  the 
pernicious  methods  of  English  financiering,  and  from  his  day 

'  Cf.  ante,  p.  112,  sq. 


PAYMENT  OF  PUBLIC  DEBTS.  269 

to  the  present  lias  the  policy  of  debt-pa jment  been,  for  the 
most  part,  clear,  simple,  and  adequate.^ 

At  the  close  of  the  war  of  1812  the  Federal  government 
found  itself  encumbered  with  a  debt  of  about  $120,000,000. 
The  permanent  appropriation  for  the  service  of  the  debt 
was  increased,  and  in  1834,  without  any  material  change  in 
the  tinancial  policy  so  far  as  the  debt  was  concerned,  the 
United  States  had  extinguished  all  its  obligations.  From 
that  date  until  1860  there  is  nothing  of  importance  in  the 
management  of  the  public  treasury  to  claim  our  present  at- 
tention ;  but  with  the  outbreak  of  the  civil  war  American 
statesmen  were  again  obliged  to  grapple  with  the  intricacies 
of  financial  problems. 

The  financial  policy  of  Secretary  Chase  has  been  already 
presented.  His  purpose  was  to  carry  through  the  war  by 
means  of  loans,  and,  to  secure  a  solid  basis  for  such  an  exten- 
sive use  of  credit,  he  made  the  debt-charges  a  first  lien  upon 
all  coin  receipts.^  These  charges  were  of  two  sorts  :  first, 
the  interest  accruing  upon  bonds  or  notes ;  second,  a  sinking- 
fund  payment  equal  to  one  per  cent  of  the  outstanding  debt, 
increased  by  the  accruing  interest  upon  all  debt  thus  re- 
deemed. 

We  find  here  an  application  of  the  "  fundamental  maxim  " 
that  "  the  creation  of  a  debt  should  always  be  accompanied 
with  the  means  of  its  extinguishment."  But  such  a  law  must 
surely  lead  to  unnecessary  embarrassment.  Its  requirement 
can  not  be  followed  under  any  conditions  in  which  a  resort 
to  borrowing  would  be  defensible,  and  it  is  folly  to  pass  a  law 
knowing  it  must  be  immediately  broken.  In  the  present 
instance  the  pressure  upon  the  Treasury  proved  stronger  than 
the  theory  of  the  Secretary.     While  the  war  continued,  there 

^  It  is  interesting  to  notice  what  perfect  harmony  exists  between  Mr.  Galla- 
tin's administration  and  the  principles  of  Robert  Hamilton's  "  Essay  on  the  Eng- 
lish Debt,"  which  is  accredited  with  having  overthrown  the  reasonings  of  Dr. 
Price.  Compare,  for  example,  the  Report  of  1811  with  the  propositions  YII, 
VIII,  and  IX  of  the  essay  by  Professor  Hamilton, 

*  Sec,  5  of  the  law  of  February  25,  1862, 


270  NATIONAL  DEFICIT  FINANCIERING. 

was  no  accumulation  in  the  sinking-fund  that  by  any  pretense 
could  be  held  as  satisfying  the  demands  of  the  law. 

Nor  can  it  be  said  that  the  establishment  of  a  sinking-fund 
in  1862  exerted  any  influence  upon  the  policy  of  debt-pay- 
ment when  the  war  was  brought  to  a  close.  Secretary  McCul- 
loch,  in  his  report  of  1865,  proceeded  as  though  no  such  fund 
existed,  and  proposed  that  the  policy  of  permanent  appropria- 
tion should  be  adopted  in  making  provision  for  the  public 
debt.  He  estimated  that  the  Federal  debt  would  amouijt  to 
$3,000,000,000,  demanding  an  annual  payment  in  interest  of 
$150,000,000 ;  and  he  proposed  an  annual  aj)propriation  of 
$200,000,000  to  the  service  of  the  debt,  which,  undisturbed  by 
any  refunding  operations,  would  expunge  the  total  debt  in 
about  twenty-eight  years.  But  no  law  was  ever  passed  which 
authorized  such  an  appropriation.  The  method  of  procedure 
for  a  number  of  years  was  to  apply  such  moneys  as  remained 
after  the  satisfaction  of  other  demands  to  the  reduction  of 
the  debt.  For  the  year  ending  June  30,  1866,  this  surplus 
amounted  to  $123,000,000,  and  during  the  fourteen  months 
following  August  31,  1865,  the  principal  of  the  public  debt 
was  reduced  $206,000,000.  This  was  a  reduction  of  $173,- 
000,000  in  excess  of  the  demands  of  the  law  of  1862,  and  an 
advance  of  about  $125,000,000  over  what  would  have  been 
accomplished  by  the  plan  of  appropriating  $200,000,000  to 
the  service  of  the  debt. 

It  was  not  until  1876  that  we  find  the  calculations  of  the 
amount  due  the  sinking-fund  assuming  any  importance.  The 
question  seems  at  this  time  to  have  been  forced  upon  public 
attention  by  the  law  of  1875,  providing  for  the  resumption  of 
specie  payments.  Nothing  is  plainer  than  that  for  the  re- 
sumption of  specie  payments  a  government  must  have  specie, 
and  the  Secretary  of  the  Treasury  was  consequently  author- 
ized to  sell  bonds  to  replenish  his  stock  of  bullion.  But  why, 
it  was  asked,  should  the  government  redeem  bonds  bearing 
interest  in  gold  while  at  the  same  time  selling  other  bonds 
for  gold  with  which  to  redeem  greenbacks  ?  Relying  upon 
this  view,  it  was  proposed  that  the  "  claims  of  the  sinking- 


PAYMENT  OF  PUBLIC  DEBTS.  271 

fund"  should  be  suspended,  and  that  the  amounts  due  it 
accruing  each  year  should  be  set  aside  as  part  of  the  coin 
destined  to  redeem  the  treasury  notes.  Something  analogous 
to  this  was  actually  undertaken  in  ajjplying  the  proceeds  of 
the  sinking-fund  to  the  redemption  of  the  debt  bearing  no 
interest.  In  the  fiscal  year  ending  June  30, 1876,  $7,000,000 
of  fractional  currency  were  redeemed  out  of  the  fund,  and 
the  amount  credited  to  the  fund  at  5  per  cent  interest.^  Near- 
ly $6,000,000  of  greenbacks,  also,  were  redeemed  out  of  the 
fund,  the  authority  for  the  redemption  being  found  in  the 
Resumption  Law  of  1875.^  Such  an  employment  of  the 
moneys  dae  the  sinking-fund  did  not  pass  unchallenged,  nor 
did  the  suggestion  that  it  be  suspended  meet  with  universal 
approval.  But  it  was  in  this  manner  that  the  interpretation 
of  the  law  of  1862  became  a  necessity. 

The  power  to  redeem  bonds  in  excess  of  the  demands  of 
the  sinking-fund  had  been  freely  exercised  previous  to  1870, 
but  in  that  year  it  was  thought  wise  to  remove  any  possible 
doubt  upon  the  subject.  It  was  provided  that  the  Secretary 
might  redeem  any  five-twenty  bonds  "  with  any  coin  in  the 
Treasury  which  he  might  lawfully  apply  to  such  purpose." 
"We  are  told  by  Mr.  ^yeston,  whose  current  articles  upon 
this  and  other  subjects  cf  national  finances  lead  us  to  regard 
him  as  a  faithful  observer,  that  "  certain  parties  endeavored 
to  persuade  Mr.  Bristow,  a  succeeding  Secretary,  to  treat 
these  payments  (in  excess  of  the  demands  of  the  law  of  1862) 
as  superseding  the  sinking-fund  for  the  future."  This,  how- 
ever, he  refused  to  do ;  and  in  this  opinion  other  Secretaries 
have  concurred.  Mr.  Morrill,  who  prepared  the  financial 
report  for  1876,  computed  that  the  law  of  1862,  as  modi- 

»  Law  of  April  17,  1816. 

^  The  Resumption  Act  repealed  the  limitation  which  had  been  placed  upon  then 
ability  of  National  Banking  associations  to  issue  notes,  but  at  the  same  time 
obliged  the  Secretary  of  the  Treasury  to  redeem  greenbacks  equal  to  80  per  cent 
of  new  notes  issued.  It  was  under  this  provision  of  the  law,  as  I  understand  the 
matter,  that  authority  was  found  for  calling  in  greenbacks.  Mr.  Weston,  writing 
in  the  "  Bankers'  Magazine,"  speaks  of  a  "  monthly  redemption  of  greenbacks 
authorized  by  the  law  of  1875,"  but  I  find  no  such  provision.  Cf.  vol.  xxxi,  p.  625. 


272  NATIONAL  DEFICIT  FINANCIERING. 

fied  by  tlie  law  of  1870,  whicli  made  all  redeemed  bonds 
a  part  of  the  sinking-fund,  would  have  been  satisfied  by 
the  redemption  of  $433,848,215.37;  but  the  actual  reduc- 
tion previous  to  June  30,  1876,  was  declared  to  have 
been  $056,992,226.44.^      It  was  not,  however,  on  this  ac- 

'  This  computation  may  be  of  interest.  "  From  the  time  when  the  first  act 
named  was  to  go  into  effect  until  August  31,  1865,  the  demands  upon  the  Treasury 
incident  to  the  war  were  greatly  in  excess  of  the  revenues  to  the  government, 
and  therefore  there  was  no  surplus  income  which  could  be  applied  to  the  extin- 
guishment of  the  debt  or  the  creation  of  a  sinking-fund,  and  consequently  th^  law 
providing  for  the  fund  was  during  that  period  necessarily  rendered  inoperative. 
"  It  will  be  noticed  that  the  statute  contemplated  that  a  certain  sum  should 
be  applied  within  each  fiscal  year  to  the  account  of  the  sinking-fund.  If  the 
resources  of  the  Treasury  during  each  fiscal  year,  commencing  with  July,  1862, 
had  been  suflBcient  to  have  made  a  literal  compliance  with  the  conditions  of  the 
law  practicable,  the  account  would,  at  the  close  of  the  last  fiscal  year,  have  ap- 
peared upon  the  books  of  the  department  as  follows  : 

"Amount  for  fiscal  year  1863 $5,566,269  97 

"  "  1864 12,184,090  62 

"  "  1865 20,233,683  45 

"  "  1866 80,490,707  15 

"  '«  1867 33,080,531  88 

"  "  1868 33,736,306  85 

"  «  1869 34,638,937  03 

«•  "  1870 35,959,651  99 

"  "  1871 36,370,257  59 

«  "  1872 36,507,573  43 

"  "  1873 36,859,924  20 

«  "  1874 38,012,930  63 

«  "  1875 39,036,019  66 

"  "  1876 40,681,331  02 

Grand  total $433,848,215  37 

"  On  the  31st  of  August,  1865,  the  public  debt,  as  represented  upon  the 
books  of  the  department,  and  shown  by  the  public-debt  statement,  reached  its 
highest  point,  viz. : 
Debt,  less  bonds  issued  to  the  various  Pacific  Railroads, 

and  less  cash  in  the  Treasury $2,756,431 ,571  43 

On  June  30,  1876,  the  debt,  including  accrued  interest, 
less  bonds  issued  to  the  Pacific  Railroad  companies, 
and  less  cash  in  the  Treasury,  was 2,099,439,344  99 

Reduction  of  the  debt $656,992,226  44 

"  The  terms  of  the  law  of  February  25,  1862,  required  by  the  operations  of 
the  sinking-fund  account  that  the  public  debt  should  be  reduced  in  the  sum  of 


PAYMENT  OF  PUBLIC  DEBTS.  273 

count  admitted  that  tlie  claims  of  tlie  sinking-fund  could  be 
suspended. 

It  seems,  then,  taking  all  things  into  consideration,  that 
there  is  no  ground  for  believing  the  law  of  1862  to  have  ex- 
erted much  influence  in  securing  the  expungement  of  so 
much  of  our  public  debt  as  has  been  already  paid.  The  sink- 
ing-fund established  by  Secretary  Chase  has  not  served  in 
fact  as  "  the  sheet-anchor  of  public  credit."  There  are,  in- 
deed, some  expressions  in  pubKc  debate  which  regard  the 
law  as  forming  part  of  the  contract  between  the  government 
and  its  creditors,  but  this  view  does  not  appear  to  have  met 
with  any  popular  response.^  How,  then,  it  may  be  asked,  is 
it  possible  to  explain  the  ease  with  which  taxes  have  been 
maintained  for  the  redemption  of  public  bonds  ?  Does 
this  show  greater  firmness  or  higher  wisdom  on  the  part  of 
American  statesmen  than  may  be  claimed  by  statesmen  of 
other  countries  ?  We  have  already  seen  that  the  content- 
ment with  which  the  English  bear  the  taxes  for  the  mainte- 
nance of  their  great  debt,  rather  than  rid  themselves  of  it  by 
a  strenuous  effort  for  a  few  years,  is  due  to  erroneous  views 
which  they  entertain  respecting  taxes.  They  firmly  believe 
that  money  left  in  the  pockets  of  the  people  will  surely 
fructify,  and  for  this  reason  they  demand  the  remission  of 
every  tax  not  needed  for  current  expenditures.  The  willing- 
ness of  the  American  people  to  maintain  high  taxes  for  the 

$433,848,215.37  between  July  1,  1862,  and  the  close  of  the  last  fiscal  year.  A 
reduction  has  been  effected  during  that  period  of  $656,992, '226.44,  or  $223,- 
144,01 1.07  more  than  was  absolutely  required. 

It  can  therefore  be  said,  as  a  matter  of  fact,  that  all  of  the  pledges  and  ob- 
ligations of  the  government,  to  make  provision  for  the  sinking-fund  and  the 
cancellation  of  the  public  debt,  have  been  fully  met  and  carried  out." 

*  Mr.  Sherman  was  accustomed  to  insist  on  the  sacredness  of  the  contract 
when  speaking  in  Congress,  but  as  Secretary,  in  the  secrecy  of  the  room  of  the 
Senate  Committee  on  Finance,  he  said  of  the  sinking-fund:  "This  act  can  only 
be  construed  as  an  authority  to  purchase  the  debt  in  case  of  surplus  revenue 
for  the  purpose.  Whatever  binding  force  it  may  have  on  Congress  is  not  for 
me  to  say.  There  is  no  particular  necessity  for  this  law."  (Interview  of  Janu- 
ary 30,  1880.  p.  45.) 


274:  NATIONAL  DEFICIT  FINANCIERING. 

payment  of  tlieir  debt  is  in  like  manner  due  to  the  prevalence 
of  an  economic  error,  though,  one  of  a  wholly  different  sort. 
It  is  held  in  this  country  that  customs  duties  are  the  occasion 
of  private  gain ;  why,  then,  should  complaint  be  made  of 
their  maintenance  for  the  payment  of  the  debt  ?  'No  finan- 
cial problem  has  occasioned  so  much  embarrassment  in  this 
country  as  the  reduction  of  taxes,  and  it  is  because  this  prob- 
lem has  proven  so  difficult  of  solution  that  the  debt  has  been 
managed  with  ease.  It  is  the  policy  of  protection  that  has 
paid  our  debts.  This  was  true  in  the  period  from  I816  to 
1836,  and  it  is  true  at  the  present  time.  The  wisdom  of  our 
statesmen  consists  in  this,  that  they  have  not  used  unwisely 
the  surplus  revenue  forced  upon  them  by  a  radically  per- 
nicious system  of  taxation. 

It  remains  for  us  to  consider  the  policy  of  debt-payment 
in  its  relation  to  the  national  banking  system,  a  question,  it 
will  be  remembered,  brought  to  our  notice  in  the  previous 
chapter.  There  are  many  who  believe  the  system  of  nar 
tional  banks  in  this  country  to  be  the  best  the  world  has  ever 
seen,  and  who,  on  that  account,  are  disinclined  to  favor  any 
policy  of  debt-payment  which  unnecessarily  endangers  its 
maintenance.  They  do  not  advocate  the  continuance  of  the 
debt  in  order  to  continue  the  banks,  but  they  do  urge  that,  so 
long  as  the  debt  shall  exist,  it  is  wise  to  use  it  in  such  a 
manner  as  to  be  of  indirect  service  to  the  public.  At  least, 
it  is  on  the  basis  of  such  a  premise  that  the  following  sug- 
gestions are  made. 

It  is  hardly  necessary  to  speak  at  length  of  the  nature  of 
the  embarrassment  under  which  the  banking  system  lies. 
The  difficulty  springs  from  the  fact  that  the  bonds  upon 
which  it  is  most  profitable  for  the  banks  to  do  business  are 
the  only  bonds  which  the  government  is  at  liberty  to  pay. 
As  has  been  already  stated,  the  public  debt  lies  in  three 
classes  of  bonds — the  three-per-cents  redeemable  at  the  pleas- 
ure of  the  government ;  the  four-and-a-half -per-cents  redeem- 
able in  1891;  and  the  four-per- cents  redeemable  in  1907. 
The  bonds  of  the  second  and  third  classes  are  worth  from 


PAYMENT  OF  PUBLIC  DEBTS. 


275 


12  to  20  per  cent  premium,  and  it  is  claimed  that  a  higher 
profit  may  be  made  in  private  banking,  on  the  basis  of  a 
given  amount  of  disposable  capital,  than  in  the  purchase  of 
high-priced  bonds  as  security  for  circulation  of  notes.  This 
is  due  to  the  fact  that  the  banking  law  permits  the  issue  of 
circulating  notes  equal  to  90  per  cent  only  of  the  par  value, 
not  the  market  value,  of  the  bonds  deposited  as  security. 
But  if  the  present  policy  of  debt-payment  continues,  the 
banks  must  soon  choose  between  the  purchase  of  four-per- 
cents  at  120  and  the  withdrawal  of  their  notes  from  circula- 
tion. 

The  danger  to  the  permanency  of  the  banking  system 
thus  pointed  out  is  not  fanciful,  as  may  be  seen  from  the  fol- 
lowing table,  which  gives  the  amounts  of  various  sorts  of 
bonds  held  as  security  for  circulation  since  1883  : 


BONDS. 

1833. 

18S4. 

1SS5. 

1SS6. 

Three-and-a-halfs  . . 

$632,000 
201,327,750 



^69.038.050 

Threes 

g5155.604.400 

8138,920,650 

Four-and-a-half  3 . . . 

Pacific  sixes 

Fours 

41,319,700        49,537,450 

3,463,000          3,469,000 

106,164,850       116.705.450 

49,547,2.50        57,436,850 

3,505,000          3,586,000 

116,391,650]     115,383,150 

8325,316,300 

Total 

8352,907,300 

8308,364,550    $245,444,050 

From  this  table  it  appears  that  the  three-per-cents  are 
fast  being  extinguished,  and  that  there  is  no  purchase  of 
bonds  of  the  other  classes  with  which  to  keep  up  the  circu- 
lation of  bank-notes.  The  banks  which  now  hold  four-per- 
cents  purchased  them  when  their  price  was  low,  and  their 
refusal  to  sell,  notwithstanding  the  high  profit  which  they 
might  in  this  manner  secure,  is  in  part  due  to  the  continued 
pressure  of  dull  times.  Should  business  revive,  so  that  free 
capital  might  easily  find  paying  investments,  there  is  reason 
to  believe  that  the  tendency  disclosed  by  the  above  table 
would  work  with  increased  rapidity.  The  problem  thus  pre- 
sented might  be  solved  by  amending  the  banking  law,  but 
we  are  only  interested  in  proposals  for  its  solution  by  some 
modification   of  the  policy  of  debt-payment.     One  way  in 


276  NATIONAL  DEFICIT  FINANCIERING. 

wliich  the  difficulty  might  be  overcome  would  be  to  expend 
the  $50,000,000  annually  due  the  sinking-fund,  and  such  sur- 
plus revenue  as  goes  to  debt  payment,  in  the  purchase  of 
high-priced  stock  at  its  market  rates.  This  would  leave 
three-per-cent  stock  to  serve  as  the  basis  of  banking  circula- 
tion. It  is  true  that  there  is  not  enough  three-per-cent  stock 
now  left  to  make  this  proposal  worth  considering,  were  it 
not  that  it  calls  our  attention  to  a»new  principle  of  debt-pay- 
ment, and  it  is  possible  that  some  analogous  plan  will  be  pre- 
sented in  connection  with  the  four-and-a-haK-per-cents  which 
fall  under  the  control  of  the  government  in  1891. 

The  question  thus  brought  to  our  notice  is  the  question 
of  paying  a  public  debt  by  purchases  at  current  rates  on  the 
market.  It  is,  however,  a  question  that  may  be  easily  under- 
stood. Payments  by  purchase  at  market  rates  may  be  ad- 
vantageous to  the  government  if  stocks  at  discount  are 
moving  toward  par.  Under  such  conditions,  not  only  is  a 
large  nominal  debt  expunged  with  a  small  payment,  but  a 
given  annuity  may  be  extinguished  by  a  smaller  payment 
than  would  be  possible  after  the  bonds  had  attained  their  par 
value.  It  is  also  true  that,  if  bonds  are  above  par,  and  the 
contract  is  so  drawn  that  there  is  no  tendency  for  them  to 
fall  as  the  years  pass,  it  would  be  quite  immaterial  whether 
such  bonds  should  be  paid  by  purchase,  or  bonds  standing  at 
par,  and  giving  the  same  return  on  capital  invested,  should  be 
paid  by  calls. 

But  neither  of  these  assumptions  conforms  to  the  condi- 
tion of  debt  in  the  United  States.  The  four-per-cent  bonds 
are  now  worth  120,  but  by  1907  they  must,  of  necessity, 
come  down  to  par.  The  three-per-cents,  now  redeemable,  are 
at  par.  The  question  involved  in  the  proposal  to  purchase 
the  high-priced  bonds  may  be  clearly  stated  if  we  ask  what 
is  the  balance  of  advantage  in  the  expenditure  of  $100  in 
the  two  methods  proposed.  If  this  sum  be  expended  in  the 
redemption  of  four-per-cents  at  premium,  rather  than  in  the 
purchase  of  three-per-cents  at  par,  the  government  makes 
an  immediate  gain  of  33|-  cents.     That  is  to  say,  in  the  first 


PAYMENT  OF  PUBLIC  DEBTS.  277 

case,  the  expenditure  of  $100  has  extinguished  an  annuity 
of  $3.33^ ;  in  the  second  case,  it  has  extinguished  an  annuity 
of  $3.  This  difference  may,  of  course,  be  put  immediately 
to  profitable  use  in  increasing  the  fund  with  which  future 
purchases  are  made.  But,  on  the  other  hand,  there  is  a  loss 
attending  this  gain.  At  the  expiration  of  twenty  years  the 
four-per-cents  will  be  redeemable  at  par,  so  that  the  pur- 
chase of  these  bonds  at  their  present  price  would  entail  a  loss 
equal  to  the  premium  paid.  For  the  expenditure  of  $100, 
this  loss  would  amount  to  $12.66f .  The  question,  therefore, 
reduced  itself  to  this :  Will  an  immediate  saving  of  33^ 
cents  improved  at  4  per  cent  compound  interest,  strength- 
ened each  year  by  a  corresponding  saving,  though  less  in 
amount  as  the  years  pass^  attain,  in  twenty  years,  to  the  sum 
of  $12.66f .  "We  can  not  tell  exactly  what  such  an  improve- 
ment would  amount  to,  for  the  saving  added  each  year, 
chargeable  to  the  liberation,  of  interest  payments,  is  not  a 
constant  factor ;  but  the  most  advantageous  calculation  would 
not  bring  the  amount  to  exceed  $10.  From  such  a  state- 
ment of  the  case,  it  is  clear  that  the  payment  of  premium 
stock  at  market  rates,  when  the  stock  is  constantly  falling 
toward  par,  is  an  expensive  operation.  It  does  not  conform 
to  sound  rules  of  finance,  provided  there  is  any  other  stock 
upon  which  the  surplus  revenue  may  be  expended. 

Another  proposal  for  adjusting  the  policy  of  debt-pay- 
ment to  the  requirements  of  the  banking  system  finds  ex- 
pression in  a  bill  recently  introduced  into  the  Senate  by 
Mr.  Aldrich.  It  is  proposed  to  expend  the  revenue  avail- 
able for  debt  extinction  in  paying  part  of  the  interest  upon 
the  high-priced  bonds  before  that  interest  becomes  due. 
This  is  in  reality  a  scheme  for  converting  part  of  the  debt 
into  such  form  that  it  may  profitably  be  used  by  the  banks 
as  basis  for  circulation.  The  details  of  the  plan  are  as  fol- 
lows :  The  holder  of  a  bond  bearing  4  per  cent  or  4r|  per 
cent  interest  is  granted  the  liberty  of  exchanging  it  for  a 
bond  bearing  2|-  per  cent  interest,  the  exchange  to  take  place 
on  the  basis  of  the  par  value  of  the  bonds.  But,  in  consid- 
19 


278  NATIONAL  DEFICIT  FINANCIERING. 

eration  of  tlie  reduced  interest,  the  holder  is  to  receive  in 
lump  a  sum  of  money  equal  to  the  aggregate  pfesent  worth 
of  the  various  interest  payments  he  would  have  received  on 
the  original  bonds,  above  the  2^  per  cent  interest  he  con- 
tinues to  receive  on  the  new  bond.  The  present  worth  of 
these  payments  is  to  be  calculated  on  the  basis  of  not  less 
than  3  per  cent  interest,  re-invested  quarter-yearly.  It  is  also 
provided  that  these  bonds  bearing  a  reduced  rate  of  interest 
shall  not  be  paid  until  all  bonds  bearing  a  higher  rate  (jf  in- 
terest shall  have  been  extinguished,  and  that  of  these  con- 
verted bonds  those  first  issued  shall  be  the  last  paid. 

It  is  doubtful  if  this  scheme  of  conversion  would  meet 
the  hearty  approval  of  large  numbers  of  bond-holders,  but  it 
would  certainly  commend  itseK  to  those  bankers  who  desire 
to  continue  the  circulation  of  bank  notes  ;  for  it  would  give 
back  to  the  banks,  in  the  form  of  anticipated  payments  of 
accruing  interest,  the  capital  now  uselessly  tied  up  in  the 
high-priced  bonds  deposited  as  security  for  notes.  The  only 
question,  then,  seems  to  be :  Does  the  plan  proposed  run 
counter  to  an j^  public  interest  ?  It  will  be  noticed  that  there 
is  one  essential  difference  between  the  anticipation  of  inter- 
est-payments, and  the  anticipation  of  the  payment  of  the 
principal  of  a  debt  by  purchases  on  the  market.  This  latter 
procedure,  as  has  been  shown,  is  expensive,  because  it  re- 
quires a  larger  sum  of  money  to  extinguish  a  given  debt  than 
will  be  required  after  the  debt  comes  to  be  redeemable ;  but 
no  such  result  follows  the  anticipation  of  interest-payments. 
These  are  determined  by  the  terms  of  the  contract,  and  may 
be  calculated  with  accuracy.  The  interest  does  not,  like  the 
market  value  of  a  debt,  fall  as  the  bonds  approach  the  period 
of  their  redemption,  and  it  is  but  the  application  of  sound 
business  rules  to  use  any  surplus  moneys  on  hand  in  making 
advanced  payments  of  interest.  This  plan,  then,  introduced 
by  Senator  Aldrich,  seems  to  be  adequate  to  the  purpose  for 
which  it  was  drawn. 

But  should  Congress  succeed  in  adjusting  the  debt  to  the 
requirements  of  the  banking  system,  its  management  in  the 


PAYMENT  OF  PUBLIC  DEBTS.  279 

future  presents  yet  other  difficulties.  The  three-per-cents  will 
probably  be  paid  during  the  course  of  the  coming  year,  but 
the  four-and-a-half-per-cents  will  not  come  under  the  control 
of  the  government  till  1891.  What  is  to  be  done  with  the 
permanent  appropriation  to  the  sinking-fund,  until  it  can 
be  economically  used  in  discharging  the  four-and-a-half-per- 
cent bonds  ?  Or,  supposing  this  difficulty  to  have  been  suc- 
cessfully overcome,  the  amount  of  debt  redeemable  in  1891 
is  but  $250,000,000 ;  and,  with  a  sinking-fund  appropriation 
of  $50,000,000  a  year,  we  shall  find  ourselves  in  1896  again 
without  any  debt  upon  which  the  appropriation  may  be  ex- 
pended. In  what  manner  shall  the  machinery  of  debt-pay- 
ment be  managed  from  1896  to  1907? 

In  this  latter  case,  it  will  probably  be  wise  for  the  sinking- 
fund  law  to  be  repealed,  or,  at  least,  for  its  operations  to  be 
suspended.  The  time  is  sufficiently  extended  to  warrant 
changes  in  the  rates  of  taxation.  Such  a  proposal  does  not, 
however,  fit  the  requirements  of  the  first  case.  Three  years 
only  intervene  between  the  extinction  of  the  three-per-cents 
and  the  time  when  the  four-and-a-half-per-cent  bonds  are  re- 
deemable, and  for  so  short  a  time  the  suspension  of  the  ordi- 
nary payments  would  be  the  source  of  great  inconvenience. 
It  will  be  observed  that  I  am  arguing  as  though  all  unneces- 
sary taxes  had  been  repealed,  for  it  is  impossible  to  proceed 
rationally  in  considering  the  finances  of  the  Federal  govern- 
ment except  we  assume  the  criminally  absurd  policy  of  sur- 
plus financiering  to  have  been  abandoned.  "Were  it,  however, 
true  that  income  were  reduced  to  the  level  of  expenditure,  a 
suspension  of  the  operation  of  the  sinking-fund  would  re- 
quire a  yet  further  reduction  of  taxes ;  but  since  the  taxes 
thus  remitted  must  be  re-imposed  in  1891,  the  evils  accom- 
panying the  change  might  be  more  serious  than  the  ex- 
penditure of  the  appropriation  in  purchase  of  high-priced 
bonds.  Indeed,  I  am  inclined  to  the  opinion  that  the  direct 
purchase  of  $150,000,000  of  second-class  bonds  would  be 
preferable  to  the  suspension  of  the  sinking-fund  for  three 
years,  were  these  the  only  alternatives  presented  to  Congress. 


280  NATIONAL  DEFICIT  FINANCIERING. 

Bat  tliere  is  another  manner  in  wliicli  this  difficulty  may 
be  overcome.  It  is  not  uncommon  for  financiers  to  apply 
the  moneys  due  a  sinking-fund  to  the  purchase  of  other  prop- 
erty than  the  debt  which  the  fund  is  supposed  to  extinguish. 
The  property  thus  purchased  is  held  as  an  offset  to  the  stock 
that  should  have  been  redeemed,  but  which  is  permitted  to 
remain  in  the  hands  of  public  creditors.  If  the  property 
purchased  be  the  source  of  annual  revenue  equal  to  the  inter- 
est paid  upon  the  stock  maintained,  the  public  is  freed  from 
all  taxes  for  support  of  the  debt,  and  reaps  the  practical  re- 
sults of  debt-extinction.  Or,  if  the  new  property  bear  a 
higher  rate  of  profit  than  the  rate  of  interest  upon  the  stock 
outstanding,  the  government  gains  by  the  operation.  By 
such  a  transaction  the  government  takes  advantage  of  its  own 
high  credit  to  effect  a  saving  for  the  people.  The  practical 
benefits  of  the  transaction  are  those  which  follow  the  conver- 
sion of  public  stock  into  bonds  bearing  a  lower  rate  of  interest. 

There  is  nothing  new  in  the  proposal  thus  suggested.  The 
debt  of  France,  for  example,  is  not  regarded  as  the  source 
of  possible  embarrassment  in  the  future,  for  the  entire  rail- 
road property  is  conceived  by  French  financiers  to  be  charged 
with  its  extinction.  Much  more  to  our  purpose,  however,  is 
a  proposal  of  Mr.  E.  Dudley  Baxter.  This  gentleman  sug- 
gests that  the  duties  imposed  upon  English  railways,  amount- 
ing to  nearly  £500,000,  shall  be  appropriated  to  establish  a 
sinking-fund  for  the  expungement  of  the  English  debt.  But 
this  appropriation  and  the  accumulations,  "  instead  of  being 
invested  in  the  debt  itself,  like  'sinking-funds  which  have 
failed,  he  proposes  to  invest  in  ordinary  or  preference  stock 
of  railways,  yielding  at  least  a  dividend  of  4  per  cent.  By 
so  doing,  he  calculates  that  at  the  end  of  seventy-two  years 
the  nation  will  be  possessed  of  about  £200,000,000  of  railway 
stock,  the  annual  revenue  of  which  at  no  more  than  4  per 
cent  will  be  equal  to  the  interest  on  £250,000,000  of  con- 
sols." ^     Such  an  operation  would  result,  assuming  the  calcu- 

*  Robert  Giffen,  "  Essays  in  Finance."    First  series,  p.  262. 


PAYMENT  OF  PUBLIC  DEBTS.  281 

lation  to  be  correct,  in  the  practical  extinction  of  £250,000,- 
000  of  public  debt  by  an  investment  of  £200,000,000  of 
money,  a  gain  which  arises  from  the  superior  credit  of  the 
state  as  compared  with  that  of  railway  corporations. 

Is  it  possible  for  the  United  States  to  adopt  at  the  pres- 
ent time  a  plan  for  the  management  of  its  sinking-fund 
similar  in  principle  to  the  one  suggested  by  Mr.  Baxter? 
Could  this  be  done  without  detriment  to  public  credit,  and 
without  loss  to  the  treasury,  the  immediate  difficulty  which 
springs  from  the  redemption  of  the  three-per-cent  bonds 
would  disappear,  while  at  the  same  time  the  claims  of  the 
sinking-fund  would  be  satisfied.  But  the  practical  question 
is :  How  may  this  appropriation  of  $50,000,000  a  year  be  ad- 
vantageously employed  ?  In  reply  to  this  question,  our 
minds  turn  most  naturally  to  the  suggestion  that  Congress 
authorize  the  Secretary  of  the  Treasury  to  purchase  local  and 
State  bonds,  in  place  of  redeeming  the  bonds  of  the  Federal 
government.  These,  for  the  most  part,  bear  a  higher  rate 
of  interest  than  the  bonds  which  would  otherwise  be  re- 
deemed, and  there  is  no  reason  why  the  purchases  might  not 
be  perfectly  safe  if  not  pushed  too  far.  Nor  can  it  be  said 
that  such  purchase  would  raise  the  price  of  local  bonds ;  for, 
in  all  probability,  the  money  spent  by  the  government  in 
this  manner  would  be  just  the  money  that  would  be  spent  by 
private  individuals  had  the  government  chosen  to  redeem  its 
own  bonds.  The  only  real  objection  to  this  proposal  arises 
from  the  political  relations  that  exist  between  the  Federal 
government  on  the  one  hand,  and  the  States  and  minor  civil 
divisions  on  the  other.  Ao  we  have  seen,  the  States  are  sov- 
ereign in  all  matters  of  contract,  and  the  difficulty  of  enforc- 
ing the  bonds  of  cities  and  counties  would  be  increased  were 
the  Federal  government  to  become  the  creditor. 

"We  are  not,  however,  restricted  to  a  purchase  of  local 
debt,  in  the  application  of  the  moneys  due  the  sinking-fund. 
It  seems  to  be  a  foregone  conclusion  that,  sooner  or  later, 
the  telegraph  property  of  this  country  will  come  under  the 
administration  of  the  Federal  government,  and  there  is  no 


282  NATIONAL  DEFICIT  FINANCIERING, 

time  so  advantageous  as  tlie  present  for  setting  this  sclieme 
on  foot.  Without  going  into  the  intricate  question  of  the 
true  value  of  this  property,  the  price  v^hich  the  government 
would  find  it  wise  to  pay  is  sufficiently  near  the  sinking- 
fund  appropriation  for  three  years  to  make  the  proposal 
worth  the  consideration  of  Congress.  But  we  must  leave 
this  as  a  mere  suggestion,  for  its  discussion  passes  beyond  the 
proper  boundary  of  our  present  study. 

The  conclusions  of  the  present  chapter  are  as  follows*: 

The  policy  of  debt-payment  is  defensible,  and  for  two 
reasons :  A  people  can  not  afford  to  wait  until  the  burden  of 
their  debt  is  reduced  by  a  fall  in  the  value  of  money ;  nor 
does  the  payment  of  the  principal  of  a  debt  retard  industrial 
development,  but,  on  the  other  hand,  the  maintenance  of  the 
principal,  and  the  continuous  payment  of  interest,  does  ob- 
struct industrial  growth. 

The  policy  of  debt-payment,  however,  should  not  be 
pushed  so  rapidly  as  to  force  the  rate  of  business  profit  be- 
low the  rate  necessary  to  sustain  industrial  hopefulness.  The 
charge  that  this  has  been  done  in  the  United  States  is  not 
well  founded. 

With  regard  to  the  methods  of  payment,  it  was  found 
that  the  old  sinking-fund  theory  was  pernicious,  because  it 
made  "  inviolable  appropriations,"  and  that  payment  by 
means  of  terminable  or  life  annuities  was  but  a  modification 
of  the  sinking-fund  theory,  and  must  for  the  most  part  be 
condemned.  The  best  method  of  payment  is  the  one  intro- 
duced by  Mr.  Gallatin,  of  making  permanent  appropriations 
to  the  service  of  the  debt  and  leaving  the  administration 
large  discretion  in  their  application. 

Payment  by  purchase  upon  the  market  at  market  prices 
is  defensible  when  bonds  are  below  par,  but  not  when 
above  par  and  so  conditioned  as  to  be  payable,  within  a 
reasonable  time,  at  their  nominal  value.  Under  such  cir- 
cumstances it  may  be  wise  to  divert  the  sinking-fund  appro- 
priation either  to  the  payment  of  interest  before  it  is  due,  or 
to  the  purchase  of  some  other  form  of  property  than  bonds. 


PART   III. 


LOCAL  DEFICIT  FINANCIERING. 


PAKT   III. 

LOCAL  DEFICIT  FII^AITCIEEmG. 


CHAPTER  I. 

COMPAEISON   OF   LOCAL   WITH    NATIONAL   DEBTS. 

Whatever  principles  for  the  management  of  a  public 
debt  have  been  discovered  in  the  foregoing  study,  are  of  a 
quite  general  character.  They  are,  for  the  most  part,  appli- 
cable to  all  peoples  and  to  all  forms  of  government ;  for  they 
are  such  as  arise  from  the  necessary  relations  existing  be- 
tween the  management  of  a  public  treasury  and  the  social,  in- 
dustrial, and  political  habits  of  peoples.  The  study  that  fol- 
lows is  directed  by  a  different  purpose.  Its  most  apparent 
design  is  to  learn  how  far  the  general  rules  of  finance  may 
be  applied  by  local  officials  in  the  performance  of  local  du- 
ties; but  the  deeper  intent  for  which  it  is  undertaken 
springs  from  a  desire  to  understand  the  course  of  financier- 
ing in  our  States  and  municipalities.  It  is  well  known  that 
the  Federal  government  on  the  one  hand,  and  the  munici- 
palities and  private  corporations  on  the  other,  have  en- 
croached upon  the  original  administrative  functions  of  the 
States,  so  that  at  present  they  have  little  occasion  to  borrow 
money.  "We  wish  to  inquire  what  causes  are  responsible  for 
so  significant  a  result.  In  contrast  with  this  the  cities  are 
observed  to  have  appealed  to  public  credit  regardless  of  con- 
sequences. The  financial  evils  of  municipal  administration 
are  so  familiar  that  they  cease  to  be  the  occasion  of  surprise, 
and  it  is  important  to  learn  whether  such  evils  are  traceable 


286  LOCAL  DEFICIT  FINANCIERING. 

to  a  disregard  of  financial  principles,  to  some  radical  defect 
in  the  organization  of  city  government,  or  to  the  imperfect 
development  of  society  itself.  No  words  are  required  to 
show  the  pertinency  of  such  a  study. 

The  remainder  of  this  essay  will  be  shaped  by  the  pur- 
pose here  set  forth ;  but  before  entering  upon  the  historical 
treatment  of  the  subject,  it  will  be  well  to  bring  the  tech- 
nical part  of  our  task  to  a  close.  Is  it  possible  for  local  offi- 
cials, in  administration  of  local  affairs,  to  adopt  those  rules 
for  the  management  of  a  treasury  applicable  to  the  guidance 
of  national  finances  ?  An  appropriate  answer  to  this  ques- 
tion calls  for  two  quite  distinct  lines  of  analysis.  The  first 
of  these  leads  us  to  notice  the  legal  status  of  those  civil  divis- 
ions granted  the  power  to  create  debt ;  by  the  second,  we  are 
brought  to  consider  the  distribution  of  functions  between  the 
various  grades  of  government,  and  the  natm*e  of  the  duties 
thus  imposed  upon  each. 

Comparison  of  Local  and  National  Debts  on  the  Basis  of 
their  Legal  Character. 

American  constitutional  law  recognizes  three  distinct 
grades  of  government.  The  first  of  these  is  the  National 
government,  composed  of  the  Federal  Executive,  the  Na- 
tional Congress,  and  the  Federal  Judiciary.  In  the  second 
grade  are  found  the  governments  of  the  various  States,  im- 
posed with  administrative  duties  complementary  to  those  of 
the  Federal  government.  These  are  separate  and  independ- 
ent centers  of  power,  thirty-eight  in  number,  each  of  which 
exercises  a  carefully-defined  jurisdiction  over  a  limited  terri- 
torial domain.  The  third  grade  of  government  is  composed 
of  the  various  minor  civil  divisions.  According  to  the  census 
of  1880,  there  were  then  in  round  numbers  2,400  counties ; 
311  cities  and  towns,  with  a  population  of  7,500  and  upward ; 
about  8,000  incorporated  cities,  villages,  and  other  small 
places  with  a  population  below  T,500 ;  about  12,000  town- 
ships having  a  ^nancial  existence ;  and  105,000  school-dis- 
tricts possessing  power  to  contract  a  debt  and  levy  a  tax. 


COMPAEISOX  OF  LOCAL  WITH  NATIONAL  DEBTS.         287 

It  may  appear  at  first  blush  that  the  principles  underly- 
ing public  law  must  be  very  difficult  to  trace,  because  of  the 
numerous  centers  of  power  they  are  called  upon  to  recog- 
nize ;  and  this  apparent  complexity  is  increased  when  it  is 
learned  that  no  one  of  these  several  grades  of  government  is 
regarded  as  the  exclusive  representative  of  sovereignty- 
The  matter,  however,  is  not  so  difficult  as  it  seems,  and  may 
be  easily  understood  when  one  learns  whence  sovereignty 
comes,  and  what  marks  the  limit  of  its  exercise  by  any  of 
the  grades  of  government. 

The  theory  of  our  political  system  [says  an  eminent  jurist] 
is  that  the  ultimate  sovereignty  is  in  the  people,  from  whom 
springs  all  legitimate  authority.  .  .  .  The  people  of  the  Union 
created  a  national  constitution,  and  conferred  upon  it  powers 
of  sovereignty  over  certain  subjects,  and  the  people  of  each 
State  created  a  State  govei'nment,  to  exercise  the  remaining 
powers  of  sovereignty,  so  far  as  they  were  disposed  to  allow 
them  to  be  exercised  at  all.^ 

From  this  it  appears  that  the  sovereignty  which  Ameri- 
can constitutional  law  recognizes  is  popular  sovereignty,  le- 
gally expressed ;  and  he  who  would  understand  how  the 
various  grades  of  government  are  related  to  each  other,  must 
notice,  not  alone  the  limit  of  their  territorial  jurisdiction, 
but  the  specific  duties  that  are  assigned  to  each.  The  sum 
of  all  these  duties,  exercised  by  the  various  centers  of  power, 
makes  up  the  totality  of  functions  that  may  be  legally  en- 
tered upon  by  governmental  agency.  This  is  the  character- 
istic feature  of  American  institutions.  The  Kmit  of  legal 
right  to  exercise  sovereign  powers  is  found  in  the  special 
functions  assigned  to  each  grade  of  government.  Should 
any  of  these  various  governments  undertake  duties  outside 
those  assigned  them,  they  are  acting  illegally ;  for,  in  so 
doing,  they  encroach  either  upon  the  jurisdiction  of  one  of 
the  other  grades  of  government,  or  upon  a  domain  of  ac- 
tivity which  the  people,  by  failure  to  enumerate  in  any  of 
their  grants  of  power,  have  thereby  declared  shall  not  be  en- 

'  Cooley's  "  Constitutional  Limitations,"  p.  36. 


288  LOCAL  DEnCIT  FINANCIERING. 

tered  upon  by  public  authority.  The  harmony  of  American 
institutions  is,  in  consequence,  found  in  the  public  law,  which 
assigns  duties  to  those  bodies  which  it  creates,  wliile  at  the 
same  time  it  limits  their  activity  to  the  performance  of  the 
duties  assigned. 

It  is  a  significant  fact  that  the  balance  in  local  indebted- 
ness conforms  quite  closely  to  the  lines  drawn  by  American 
constitutional  law.  This  is  partially  explained  when  we 
notice  that  the  development  of  public  law  is  something  of 
a  record  of  those  manifold  changes  which  make  up  social 
development,  and  of  which  the  employment  of  local  credit 
is  an  expression.  But  it  is  more  directly  due  to  the  inter- 
pretation placed  by  the  courts  upon  the  contracts  entered 
into  when  a  city  or  a  State  borrows  money.  The  balance 
of  indebtedness  within  the  last  thirty  years  has  shifted  from 
the  States  to  the  minor  civil  divisions,  and  this  can  only  be 
understood  after  learning  the  legal  character  of  debt-paper 
and  the  inducements  which  led  to  a  resort  to  credit. 

The  legal  character  of  a  Federal  bond  has  been  already 
described.  It  is  a  simple  contract  between  a  subject  on  the 
one  hand  and  a  sovereign  on  the  other.  If  a  subject  lend 
money  to  his  own  government,  he  holds  no  remedy  at  law 
should  payment  be  refused  ;  or,  if  the  creditor  of  a  default- 
ing State  be  the  subject  of  a  foreign  power,  he  exhausts  his 
full  legal  right  in  petitioning  his  own  government  to  make 
his  grievance  the  occasion  of  diplomatic  correspondence.  No 
government  that  enjoys  the  privileges  of  sovereignty  can  be 
forced  against  its  will  to  appear  in  court  as  a  defendant. 
How  does  this  matter  stand  with  regard  to  the  promises  of  the 
commonwealths  that  make  up  the  Federal  Union  ?  Are  such 
contracts  of  a  sovereign  character  ?  If  we  compare  the  duties 
assigned  to  the  three  grades  of  governments  mentioned  above, 
it  will  be  found  that  the  activity  of  the  States  holds  in  view 
the  same  general  purposes  as  that  of  the  minor  civil  divisions. 
Indeed,  public  law  assumes  that  counties  and  cities  perform 
gratuitously  what  otherwise  must  have  been  done  at  State  ex- 
pense.    The  duties  of  the  Federal  government,  on  the  other 


COilPAEISON  OF  LOCAL  WITH  NATIONAL  DEBTS.         289 

Land,  call  into  frequent  exercise  tlie  power  of  national  sov- 
ereiontj.  On  this  account  it  might  be  reasonably  ex- 
pected that  a  State  contract  would  be  similar  to  that  of  a 
city  or  a  county,  rather  than  conform  in  legal  character  to 
that  of  a  Federal  bond.  This  is  not,  however,  the  case. 
Another  theory  of  constitutional  interpretation  has  given 
a  distinctively  sovereign  character  to  the  obligations  of 
States. 

It  will  be  remembered  that  the  powers  of  the  common- 
wealths, as  well  as  those  of  the  Federal  government,  came 
directly  from  the  people,  while  those  of  the  municipalities 
were  derived  indirectly  through  the  local  legislatures ;  for 
this  reason  it  has  come  about  that  a  State  bond  and  a  Federal 
bond  stand  before  the  law  as  a  contract  of  the  same  grade, 
while  the  bond  of  a  city  or  of  a  county  possesses  altogether 
a  different  character.  A  State  contract  lies  beyond  the  reach 
of  the  courts,  and  no  power  of  mandamus  can  enforce  the 
levy  of  a  tax  to  insure  its  payment. 

It  certainly  seems  a  little  anomalous  that  a  grade  of  gov- 
ernment limited  to  the  exercise  of  local  functions,  and  never 
called  upon  to  borrow  money  except  for  industrial  purposes 
or  for  the  purpose  of  local  defense,^  should  be  granted  the 
protecting  robe  of  complete  sovereignty  the  moment  it  as- 
sumes the  role  of  a  debtor.  Among  the  least  of  the  criticisms 
suggested  by  this  state  of  affairs  is  the  fact  that  it  shows  in- 
consistency in  our  public  law.  Here  is  an  established  gov- 
ernment, with  no  jurisdiction  over  questions  of  war  and 
peace,  yet  permitted  to  take  steps  that,  according  to  univer- 
sally accepted  rules  of  international  law,  may  lead  directly 
to  foreign  complications.  The  duty  of  protecting  all  citizens 
of  the  United  States  from  foreign  interference  is  assigned  to 
the  Federal  government,  but  with  this  duty  there  is  con- 
ferred no  power  of  restraining  the  States  from  entering  into 
financial  engagements  with  foreign  peoples  that  may  give 

'  Even  in  the  case  of  local  defense  or  a  local  insurrection,  the  governor  of  a 
State  may  call  upon  the  President  of  the  United  States  for  assistance.  There  is 
no  occasion  for  local  war-debts. 


290  LOCAL  DEFICIT  FINANCIERING. 

rise  to  controversy,  or  of  taking  steps  bj  wliicli  disputes 
may  be  settled. 

But  tbis  peculiarity  of  public  law  may  be  presented  in  a 
more  serious  ligbt.  The  sovereignty  which  States  take  upon 
themselves  when  they  become  debtors  is  believed  to  be  the 
source  of  administrative  weakness  ;  and,  if  the  history  of  the 
entire  subject  as  it  unfolds  before  us  shows  this  to  be  true, 
whoever  regards  it  as  desirable  that  the  integrity  of  the 
commonwealths  should  be  maintained  must  be  willing  to 
give  up  the  shadow  of  sovereignty  for  the  substance  of 
power.  This  question  of  the  legal  chaVacter  of  debt-paper, 
appropriate  to  the  use  of  governments  of  the  intermediate 
grade,  is  one  that  may  well  be  held  in  mind  throughout  the 
remainder  of  this  study ;  for  it  is  closely  allied  to  the  ques- 
tion placing  restrictions  upon  the  inferior  governments  in  ^ 
the  use  of  their  credit.^ 

Let  us  then  inquire  what  thought  has  been  bestowed  by 
publicists  and  jurists  upon  the  legal  character  of  State  bonds. 
So  far  as  this  appears  in  the  records  of  judicial  controversy, 
the  question  involved  has  been  altogether  one  of  legal  pro- 
cedure. The  only  question  thus  far  presented  to  the  court 
is  the  following  :  Can  a  State  be  made  to  appear  as  defend- 
ant in  a  suit  brought  by  a  private  citizen  ?  There  are  three 
possible  conditions  in  connection  with  which  this  question 
might  arise.  Thus,  the  plaintiff  might  be  a  citizen  of  the 
State  refusing  to  meet  the  conditions  of  its  obligations,  he 
might  be  a  citizen  of  another  State,  or  he  might  be  the  sub- 
ject of  a  foreign  power.  It  is  not,  however,  necessary  to  dis- 
tinguish between  these  three  classes  of  possible  cases,  for  if 
relief  were  granted  to  one  set  of  creditors  it  would  probably 
be  granted  to  all. 

It  is  further  worthy  of  notice  that  this  immunity  against 
suit  now  enjoyed  by  the  States  was  not  granted  them  by 
the  Constitution  as  originally  adopted.  The  language  of  that 
instrument,  in  defining  the  jurisdiction  of  the  Federal  court, 

'  This  question  will  be  considered  at  length  in  the  last  chapter  of  this  treatise. 


COMPARISON  OF  LOCAL  WITH  NATIONAL  DEBTS.         291 

is,  that  the  power  of  the  court  should  extend  "  to  all  contro- 
versies between  two  or  more  States  [or]  between  a  State  and 
citizens  of  another  State."  There  can  be  no  doubt  as  to  the 
literal  interpretation  of  this  language.  It  most  certainly 
grants  a  citizen  the  right  to  summon  a  State  as  defendant 
before  the  bar  of  the  Federal  court.  There  are,  however,  the 
strongest  reason  for  believing  that  the  Constitution  would 
never  have  been  adopted  had  it  been  recognized,  at  the  time 
the  discussions  respecting  it  were  going  on,  that  this  inter- 
pretation would  be  accepted  by  the  courts.^ 

It  was  not  long,  however,  before  the  Federal  court  was 
called  upon  to  interpret  this  clause  of  the  Constitution.  In 
1792  a  citizen  of  South  Carolina  brought  suit  against  the 
State  of  Georgia  for  the  recovery  of  a  debt.'*  The  nature  of 
this  obligation  is  of  no  importance ;  the  question  forced  into 
prominence  by  the  Attorney-General,  Mr,  Randolph,  and  de- 
cided by  the  court  was  as  follows:  "Can  the  State  of 
Georgia,  being  one  of  the  United  States  of  America,  be 
made  a  party  defendant  in  any  case,  in  the  Supreme  Court 
of  the  United  States,  at  the  suit  of  a  private  citizen  ?  To 
this  the  court,  with  one  dissenting  voice,  answered  in  the 
aflSrmative.  The  simple  reading  of  the  document,  independ- 
ently of  any  intention  on  the  part  of  the  people,  was  ac- 
cepted as  final  with  the  court."  Immediately  upon  this 
decision,  other  suits  were  instituted  of  the  same  character. 
These  aroused  the  attention  of  the  States,  and  they  made 
quick  demand  for  some  change  in  the  organic  law  of  the 
country,  which  should  secure  them  against  being  called  to 
appear  as  defendant  at  the  suit  of  a  private  person,  except 
in  such  cases  as  were  provided  for  by  their  own  laws.  For 
example,  judgment  was  rendered  in  a  suit  brought  against 

'  We  can  not  enter  upon  a  discussion  of  this  point,  but  the  reasons  for  the 
opinion  expressed  may  be  suggested  by  the  following  references : 

Elliot's  "  Debates,"  vol.  iil,  pp.  532,  543,  555  ;  from  which  one  may  learn  the 
view  taken  in  the  Virginia  convention.  Compare  also  Hamilton's  views  as  ex- 
pressed in  the  "  Federalist,"  No.  Ixxxi. 

*  Chisholm  v.  Georgia,  2  Dallas,  419. 


292  LOCAL  DEFICIT  FINANCIERING. 

Massaclmsetts,  and  a  process  served  on  John  Hancock,  her 
governor,  Resolutions  were  immediately  passed  by  the 
general  court  of  that  commonwealth,  which  instructed  her 
senators  and  representatives — 

To  adopt  the  most  speedy  and  effectual  measures  in  their 
power  to  obtain  such  amendments  in  the  Constitution  of  the 
United  States  as  will  remove  any  clause  or  articles  of  the  said 
Constitution  which  can  be  construed  to  imply  or  justify  a  de- 
cision that  a  State  is  compelled  to  answer  in  any  suit  by  an  in- 
dividual or  individuals  in  any  courts  of  the  United  States*^ 

Other  States  took  active  measures  looking  toward  the 
same  end. 

As  a  result  of  this  agitation,  the  eleventh  amendment'^ 
•was  adopted,  which  has  secured  the  States  in  their  sovereign 
character  as  public  debtors.     This  amendment  declares  that : 

The  judicial  iwwer  of  the  United  States  shall  not  he  con- 
strued to  extend  to  any  suit  in  law  or  equity,  commenced  or 
prosecuted  against  one  of  the  United  States  by  citizens  of 
another  State,  or  by  citizens  or  subjects  of  any  foreign  state. 

The  principle  involved  in  this  amendment,  which  it  must 
be  confessed  has  destroyed  the  harmony  and  completeness 
that  at  first  existed  in  American  public  law,  has  controlled  all 
subsequent  decisions.  There  has,  so  far  as  I  am  aware,  been 
but  one  attempt  to  break  its  force.  A  few  years  ago  certain 
acts  were  passed  by  the  legislatures  of  the  States  of  E'ew 
Hampshire  and  New  York  for  the  purpose  of  protecting 
their  citizens  who  might  be  holders  of  repudiated  bonds  of 
other  States.  The  form  of  procedure  instituted  by  these 
laws  was  altogether  simple.  It  will  be  noticed  that  the  amend- 

'  "  United  States  Reports,"  vol.  cviii,  p.  88. 

"^  It  has  been  stated  that  this  amendment  was  not  passed  in  defense  of  the 
sovereignty  of  the  States,  but  merely  as  a  business  procedure.  Thus,  there 
were  many  claims,  unjust  in  themselves,  but  which  according  to  law  might  be 
successfully  pleaded,  and  it  was  thought  best  to  permit  these  claims  to  be  urged 
before  a  body  that  could  judge  of  their  equity  as  well  as  their  validity.  This  is 
the  view  of  the  matter  taken  by  the  court  itself,  as  may  be  seen  from  a  later  de- 
cision.   Cf.  Cohens  v.  Virginia,  6  Wheaton,  406. 


COMPARISON   OF  LOCAL   WITH   NATIONAL  DEBTS.         £93 

ment  did  not  take  from  the  Federal  court  the  right  of  original 
jurisdiction  over  cases  that  might  arise  between  States.  These 
laws,  therefore,  permitted  individuals,  citizens  of  either  State, 
to  assign  an  unsatisfied  obligation  to  their  respective  States, 
in  which  case  the  State  was  to  bring  suit  for  recovery  in  its 
own  name.^ 

It  requires  no  very  exhaustive  study  of  constitutional  law 
to  discern  the  puerile  character  of  this  attempt  to  evade  the 
plain  intention  of  the   eleventh  amendment.     When  these 

'  The  following  is  the  text  of  the  New  York  law : 
AN  ACT  to  protect  the  rights  of  citizens  of  this  State  owning  and  holding 
claims  against  other  States,  passed  May  15,  1880. 

The  People  of  the  State  of  Neio  York,  represented  in  Senate  and  Assembly^  do 
enact  as  follows : 

Section  1.  Any  citizen  of  this  State,  being  the  owner  and  holder  of  any 
valid  claim  against  any  of  the  United  States  of  America,  arising  upon  a  written 
obligation  to  pay  money,  made,  executed,  and  delivered  by  such  State,  which 
obligation  shall  be  past  due  and  unpaid,  may  assign  the  same  to  the  State  of 
New  York,  and  deliver  the  assignment  thereof  to  the  Attorney-General  of  the 
State.  Such  assignment  shall  be  in  writing,  and  shall  be  duly  acknowledged 
before  an  officer  authorized  to  take  the  acknowledgment  of  deeds,  and  the  cer- 
tificate  of  such  acknowledgment  shall  be  duly  indorsed  upon  such  assignment 
before  the  delivery  thereof.  Every  such  assignment  shall  contain  a  guarantee 
on  the  part  of  the  assignor,  to  be  approved  by  the  Attorney-General,  of  the  ex- 
penses of  the  collection  of  such  claim,  and  it  shall  be  the  duty  of  the  Attorney- 
General,  on  receiving  such  assignment,  to  require,  on  behalf  of  such  assignor, 
such  security  for  said  guarantee  as  he  shall  deem  adequate. 

Sec.  2.  Upon  the  execution  and  delivery  of  such  assignment  in  the  manner 
provided  for  in  Section  1  of  this  act,  and  furnishing  the  security  as  in  said  sec- 
tion provided,  and  the  delivery  of  such  claim  to  him,  the  Attorney-General  shall 
bring  and  prosecute  such  action  or  proceeding,  in  the  name  of  the  State  of  New 
York,  as  shall  be  necessary  for  the  recovery  of  the  money  due  on  such  claim, 
and  the  said  Attorney-General  shall  prosecute  such  action  or  proceeding  to  final 
judgment,  and  shall  take  such  proceedings  after  judgment  as  may  be  necessary 
to  effectuate  the  same. 

Sec.  3,  The  Attorney-General  shall  forthwith  deliver  to  the  Treasurer  of 
the  State,  for  the  use  of  said  assignor,  all  moneys  collected  upon  such  claim,  first 
deducting  therefrom  all  expenses  incurred  by  him  in  the  collection  thereof,  and 
said  assignor  or  his  legal  representatives  shall  be  paid  said  money  by  said  treas- 
urer upon  producing  the  check  or  draft  therefor  of  the  Attorney-General  to  hia 
or  their  order  and  proof  of  his  or  their  identity. 
Sec.  4.  This  act  shall  take  effect  immediately. 
20 


294 


LOCAL   DEFICIT   FINANCIERING. 


enactments  came  before  the  Supreme  Court,  they  were,  with- 
out much  ceremony,  set  aside  as  unconstitational.^  The  case 
of  the  plaintiff  rested  upon  two  arguments :  the  one,  already 
recited,  that  the  suit  was  in  reality  a  suit  between  States,  per- 
mitted and  consequently  provided  for  by  the  Constitution ; 
the  other,  that  a  State  was  the  sovereign  trustee  for  its  people, 
and  on  this  account  was  clothed  with  the  right  and  faculty  of 
making  imperative  demands  upon  independent  States  for  the 
payment  of  debts  due  its  citizens. 

In  answer  to  the  first  claim,  the  court  decided  that  ^the 
States,  as  parties  prosecuting  to  the  suits,  were  "nothing  less 
than  collecting  agents  of  the  owners  of  the  bonds  and  cou- 
pons," and  in  consequence  refused  to  admit  the  suits.  In 
answer  to  the  second  claim,  the  court  pointed  out  the  essen- 
tial difference  between  the  sovereignty  of  a  State  vested 
with  the  power  to  declare  war  and  determine  peace,  and  that 
of  a  State  from  which  that  power  has  been  taken.  The 
claims  were  therefore  not  allowed. 

This  decision  seems  to  set  aside  all  hope  for  legal  remedy 
so  long  as  the  general  principle  of  the  eleventh  amendment 
controls  the  judgments  of  the  court.  And,  indeed,  should  the 
difficulty  imposed  by  this  part  of  the  organic  law  be  removed, 
it  might  yet  remain  a  question  how  judgments  favorable  to 
a  plaintiff  could  be  enforced  against  the  wish  of  a  State 
legislature.  The  only  method  of  procedure  known  to  the 
court  is  by  a  writ  of  mandamus,  but  this  sovereign  writ  ex- 
tends no  further  than  to  the  enforcement  of  ministerial  func- 
tions established  by  some  definite  law.  It  is  not  too  much 
to  say  that,  without  a  complete  modification  of  the  relation 
existing  between  the  States  and  the  Federal  government,  the 
holder  of  a  State  bond  relies  wholly  upon  the  faith  of  the 
local  legislature  for  security  in  his  property. 

It  is  interesting  to  inquire  if  other  than  legal  methods 
have  ever  been  suggested  for  the  enforcement  of  debts  of 


*  Cf.  case,  New  Hampshire  z*. Louisiana,  and  New  York  v.  Louisiana.  "United 
Statca  Reports,"  vol.  cviii. 


COMPARISON   OF  LOCAL   WITH  NATIONAL  DEBTS.         295 

this  sort.  There  have  been  some  suggestions  looking  in  this 
direction,  but  it  is  difficult  to  say  if  they  were  presented  in 
good  faith.  Thus,  the  proposal  has  appeared  in  print  that 
States  refusing  to  satisfy  just  demands  should  be  deprived 
of  their  representation  in  Congress.  It  is  charitable  to  regard 
this  as  a  sarcasm  upon  the  present  condition  of  public  law, 
for  certainly  if  the  individual  States  are  denied  the  right  of 
secession,  the  Federal  government  can  not  properly  exercise 
the  right  of  ejection.  A  more  interesting  proposal  of  the 
same  sort  is  traceable  to  the  pen  of  John  Quincy  Adams. 
Being  a  member  of  the  committee  of  the  House  of  Kepre- 
sentatives,  in  1843,  to  which  was  referred  a  plan  for  the  re- 
sumption of  the  existing  State  debts,  he  moved,  upon  March 
2d  of  that  year,  the  following  extraordinary  resolutions,  as  subr 
stitutes  for  those  presented  by  the  committee : 

1.  Mesolved,  That  the  repudiation  by  any  State  of  this  Union 
of  any  debt  to  foreigners,  contracted  by  authority  of  the  Legis- 
lature of  said  State,  is  a  violation  of  the  Constitution  of  the 
United  States,  in  the  first  paragraph  of  the  tenth  section  of  the 
first  article,  which  provides  that  no  State  shall  pass  any  law 
impairing  the  obligation  of  contracts. 

2.  Resolved,  That  if  any  State  of  this  Union,  by  or  in  con- 
sequence of  such  repudiation,  involve  herself  in  war  with  any 
foreign  power,  the  Congress  of  the  United  States  has  no  power 
to  involve  thera,  or  any  other  of  the  States  of  this  Union,  or  the 
people  thereof,  in  such  war. 

3.  Resolved,  That,  in  the  event  of  such  a  war,  the  State  in- 
volving herself  therein  will  cease  thereby  to  be  a  State  of  this 
Union,  and  will  have  no  right  or  claim  to  aid  in  her  defense 
from  the  United  States,  or  any  one  of  them.^ 

It  is  probable  that  Mr.  Adams  intended  no  more  by  these 
resolutions  than  to  bring  squarely  before  Congress  the  anom- 
alous condition  of  American  law.  He  knew  they  would 
not  be  acted  upon,  for  they  were  moved  as  a  minority  substi- 
tute for  the  report  of  a  committee  that,  had  it  been  unani- 
mous in  its  recommendations,  could  have  secured  no  following 
in  the  House,     l^othing  but  a  willing  surrender  by  the  States 

'  Johnson's  Report  upon  the  "  Relief  of  the  States,"  p,  559.  Being  Report 
No,  296,  27th  Congress,  3d  session,  House  of  Representatives. 


296  LOCAL   DEFICIT   FINANCIERING. 

of  their  sovereign  character  as  borrowers  of  money  can  give 
their  creditors  a  legal  guarantee  for  capital  loaned.  "Whether 
or  not  it  would  be  wise  to  urge  such  a  measure  upon  the 
people  is  a  pertinent  question  in  the  present  state  of  affairs, 
but  a  question  for  which  an  intimate  knowledge  of  the  history 
of  local  debts  can  alone  furnish  an  answer.  We  may  then 
pass,  for  the  time,  further  consideration  of  the  States  as  cen- 
ters of  indebtedness,  to  inquire  how  municipal  corporations 
stand  before  the  law  when  creating  pecuniary  obligations 
against  themselves. 

The  various  governments  of  the  third  grade,  known  under 
the  generic  name  of  municipal  corporations,  are  the  creatures 
of  the  States,  and  wholly  under  their  control.  They  are 
created  by  general  law  or  by  special  charter,  and  find  in 
such  law  or  charter  the  limit  of  both  their  duties  and  their 
privileges.  According  to  the  accepted  theory  of  law,  a  mu- 
nicipality performs  nothing  for  itself,  but  in  caring  for  local 
affairs  it  performs  a  gratuitous  service  for  the  State.  This 
theory  gives  color  to  all  the  contracts  of  inferior  governments. 
If  a  municipal  corporation  be  the  creature  of  the  State 
legislature  and  act  as  the  agent  of  the  State,  the  character 
of  sovereignty  can  not  attach  to  its  promises.  It  is  uni- 
versally provided  that  minor  civil  divisions  may  be  forced 
to  appear  as  parties-defendant  in  civil  suits  ;  and  from  this  it 
follows  that  if  a  county  or  city  bond  be  declared  a  valid  obli- 
gation, its  holder  possesses  a  clear  remedy  in  case  payment 
upon  it  is  refused.  This  fact,  that  the  bonds  of  civil  corpo- 
rations may  be  made  the  basis  of  legal  procedure,  goes  far  in 
explaining  the  ease  with  which  cities  can  procure  money  on 
credit.  It  is  only  necessary  to  know  that  the  corporation  acts 
within  its  legal  authority  in  issuing  obligations,  and  its  bonds 
may  be  regarded  as  a  safe  investment. 

It  is  not  intended  to  leave  the  impression  that  public  law 
relative  to  municipal  bonds  is  altogether  clear  and  simple  ; 
the  learned  treatises  upon  this  subject,  and  the  multitude  of 
cases  that  have  come  before  the  courts,  declare  how  erroneous 
would  be  such  an  impression.     Indeed,  it  is  not  possible  to 


COMPARISON  OF  LOCAL  WITH  NATIONAL  DEBTS.         297 

proceed  much  further  than  the  general  statements  presented 
above,  unless  one  is  willing  to  confine  his  attention  to  some 
particular  locality.  The  courts  of  Massachusetts,  for  exam- 
ple, as  also  those  of  the  ISTew  England  States  in  general, 
follow  a  rule  for  collecting  a  judgment  against  a  municipal 
corporation  quite  peculiar  to  themselves.  It  is  the  general 
practice  in  these  States  that  "  judgments  against  a  quasi  cor- 
poration may  be  satisfied  out  of  the  property  of  any  individ- 
ual inhabitant."  That  is  to  say,  the  legal  rule  of  partnership 
seems  to  be  applied  to  the  citizens  of  a  municipality.  The 
individual  whose  private  property  is  attached  to  satisfy  a 
public  claim  would,  of  course,  have  just  action  against  other 
citizens  if  the  corporation  refused  to  reimburse  him  for  the 
payment ;  and  the  consequence  is  that  the  corporate  authori- 
ties will  certainly  provide  for  meeting  such  claims  as  can  be 
sustained  in  the  courts.  Outside  of  New  England  it  is  not 
permitted  to  issue  writs  against  the  inhabitants  of  towns  as 
parties  to  a  city  contract,  nor  would  it  be  feasible  to  introduce 
this  method  of  procedure  in  other  States.  "  This  practice," 
says  Judge  J.  G.  Brainard,  "  with  regard  to  towns,  has  pre- 
vailed in  New  England  from  an  early  period — from  its  first 
settlement — a  practice  brought  by  our  forefathers  from  Eng- 
land, which  had  there  obtained  in  corporations  similar  to  the 
towns  incorporate  in  New  England."  ^ 

It  is  quite  possible,  also,  that  this  proprietary  view  of 
the  relation  existing  between  the  inhabitants  of  a  town 
was  strengthened  by  the  character  of  the  old  colonial  gov- 
ernments and  political  practices.  The  perfect  equality 
among  all  members  of  the  civil  corporations,  the  democratic 
organization  of  the  churches,  and,  above  all,  the  practices  of 
the  town  meetings,  must  have  led  naturally  to  this  sense  of 
personal  responsibility  for  all  public  acts.  But  in  the  South- 
ern States,  whose  history  and  habits  of  thought  have  been 
quite  different ;  or  in  the  "Western  States,  where  governments 
were  jDrovided  for  even  before  settlers  made  their  appearance, 

'  6  Conn.  223,  cited  by  Cooley  in  "  Constitutional  Limitations,"  p.  801. 


298  LOCAL  DEFICIT  FINANCIERING. 

it  woiiM  be  impossible  to  recognize  the  responsibility  of  indi- 
viduals for  obligations  incurred  by  the  civil  authorities. 

It  is  sometimes  urged,  in  favor  of  an  extension  of  this 
!N'ew  England  method  of  procedure,  that  a  municipal  corpo- 
ration has  no  common  fund  apart  from  the  property  of  its 
citizen-members.  This  might  be  tenable  if  other  means  of 
enforcing  public  obligations  were  not  provided.  This  is  the 
view  taken  by  Judge  T.  M.  Cooley.    He  says  : 

So  far  as  this  rule  rests  upon  the  reason  that  these  organi- 
zations have  no  common  fund,  and  that  no  other  mode  exists 
by  which  demands  against  them  can  be  enforced,  it  can  not  be 
considered  applicable  to  those  States  where  express  provision  is 
made  by  law  for  compulsory  taxation  to  satisfy  any  judgment  re- 
covered against  the  corporate  body — the  duty  of  levying  the  tax 
being  imposed  upon  some  officerwhomay  be  compelled  by  man- 
damiis  to  perform  it.  Nor  has  any  usage,  so  far  as  we  are  aware, 
grown  up  in  any  of  the  newer  States,  like  that  which  had  so  ear- 
ly an  origin  in  New  England.  More  just,  convenient,  and  inex- 
pensive modes  of  enforcing  their  demand  have  been  established 
by  statute,  and  the  rules  concerning  them  are  conformed  more 
closely  to  those  which  are  established  for  other  corporations.^ 

An  examination  of  the  provisions  for  recovering  judg- 
ments against  civil  corporations  established  by  other  than  the 
New  England  States,  shows  that  payment  can  not  be  avoided 
except  through  the  acquiescence  of  the  State  legislature,  or 
by  its  direct  assistance.  The  principle  according  to  which 
compulsory  taxation  is  defended  is  altogether  tenable,  resting 
as  it  does  upon  the  ground  "  that  when  a  political  corporation 
has  contracted  a  debt,  or  incurred  an  obligation,  it  bas  already 
taken  the  initiatory  step  in  taxation,  and  has,  in  effect,  given 
its  consent  that  the  subsequent  steps,  so  far  as  they  may  be 
essential  to  the  discharge  of  such  debt  or  obligation,  may  be 
taken."  But  the  spirit  of  strict  fidelity  to  obligations  incurred 
is  seldom  stronger  in  the  legislatures  than  in  the  localities 
themselves,  and  it  sometimes  happens  that  municipal  author- 
ities find  their  delinquencies  encouraged*  rather  than  their 
duties  enforced.  Still  the  matter  does  not  rest  wholly  with 
the  legislatures.    If  the  courts  remain  untainted  by  the  spirit 

'  "  Constitutional  Limitations,"  p.  302. 


COilPAEISON  OF  LOCAL  WITH  NATIONAL  DEBTS.         299 

of  repudiation,  thej  can  usually  discover  some  legal  metHod 
of  enforcing  valid  obligations  ;  or,  if  this  be  impossible,  the 
penalty  which  they  are  able  to  exact  for  repudiation  is  so 
severe  that  most  corporations  prefer  the  payment  of  the 
necessary  tases.^  It  seems,  then,  that  the  general  tmth  re- 
specting the  bonds  of  minor  civil  divisions  is  that,  if  issued 
conformably  to  legal  requirements,  they  may  be  made  to  serve 
as  the  basis  of  successful  suit  at  law ;  and  in  this  respect  they 
differ  from  the  bonds  of  the  Federal  government  or  from 
those  of  the  several  States.  As  already  suggested,  this  fact 
must  be  held  in  view  in  endeavoring  to  explain  the  balance 
of  local  indebtedness. 

Comparison  of  Local  and  National  Debts  on  the  Basis  of 
Functions  Assigned. 

The  rule  according  to  which  public  functions  are  allotted 
to  the  various  centers  of  power  in  the  United  States  is  quite 

'  There  are  three  methods  by  which  political  corporations  have  endeavored 
to  elude  the  payment  of  valid  claims. 

1.  They  have  secured  the  enactment  of  State  laws  limiting  the  rate  of  taxa- 
tion ;  providing  then  for  current  expenditure  so  as  to  exhaust  the  proceeds  of 
taxes  permitted  by  law,  they  have  urged  their  inability  to  meet  outstanding 
claims.  The  courts,  however,  have  quite  generally  held  that  such  restrictions 
could  not  be  construed  as  applying  to  bonds  issued  before  the  enactment  of  the 
law ;  while  for  bonds  issued  subsequent  to  its  enactment,  one  condition  of  their 
legality  is  that  they  shall  not  cause  such  an  addition  to  the  tax  levy  for  current 
and  necessary  expenditure  as  to  bring  the  total  levy  above  the  legal  limit.  This 
method,  therefore,  of  evading  valid  claims,  seems  to  be  inadequate  to  the  de- 
mands made  upon  it. 

2.  Cities  have  sometimes  secured  from  the  legislature  a  revocation  of  their 
charter.  The  Memphis  case  is  the  important  case  bearing  upon  this  point.  In 
this  instance  judgment  was  secured  against  the  representatives  of  the  defunct 
corporation  ;  but  as  nothing  in  the  nature  of  assets  existed,  it  was  impossible  for 
the  receiver  to  satisfy  the  judgment.  Thus  it  appears  that  by  abolishing  self- 
government  the  citizens  of  a  municipality  may  avoid  their  financial  responsibilities. 

3.  The  third  method  of  evading  payment  consists  in  the  repeated  resigna- 
tion of  public  officers.  But  although  this  may  be  kept  up  for  a  number  of 
years,  it  has  never,  so  far  as  I  am  aware,  succeeded  in  extinguishing  a  valid 
claim  against  a  municipality.  It  is  possible  for  towns  to  become  bankrupt,  so 
that  creditors  find  it  for  their  interest  to  reduce  their  claims  ;  but  it  would  be 
an  extraordinary  procedure  for  a  court  to  order  such  a  reduction. 


300  LOCAL  DEFICIT  FINANCIERING. 

simple  for  one  who  understands  tlie  political  philosophy  of 
democratic  governments.  The  safety  of  democratic  institu- 
tions lies  in  the  realization  of  local  self-government,  and  the 
principle  that  controls  in  matters  of  organization  is  that  the 
administration  of  all  powers  should  lie  as  closely  as  possib*le 
to  those  interested  in  their  exercise.  This  theory  of  allot- 
ment would  grant  to  the  Federal  government  all  duties 
touching  purely  national  and  sovereign  questions ;  it  would 
press  upon  the  local  centers  of  administration  such  functions 
as  are  of  peculiar  local  interest ;  while  the  States,  stand^ing 
between  the  two,  would  gather  up  into  themselves  all  the  re- 
maining powers  that  the  people  have  chosen  to  place  out  of 
their  own  immediate  control. 

From  this  it  seems  natural  to  expect  that  local  financier- 
ing should  differ  from  that  of  the  Federal  government  chiefly 
in  the  variety  of  purposes  for  which  money  is  borrowed,  and 
a  glance  at  the  history  of  local  administration  shows  this  ex- 
pectation to  have  been  met.  The  commonwealths  have  fre- 
quently borrowed  money  for  purposes  regarded  as  lying  out- 
side the  appropriate  duties  of  Congress,  and,  when  we  come 
to  consider  the  course  of  municipal  financiering  since  1860, 
it  will  be  seen  that  the  activity  of  the  minor  civil  divisions 
has  also  greatly  extended. 

The  first  occasion  upon  which  the  States  employed  their 
credit  as  a  source  of  revenue  brings  to  view  the  financial 
operations  of  the  Revolutionary  War.  There  was,  at  this 
time,  much  confusion,  both  of  thought  and  of  action,  and  the 
line  of  distinction  between  the  local  duties  of  the  States  and 
the  comprehensive  duties  of  the  central  government  had  not 
yet  been  drawn.  The  States  had  not  yet  surrendered  any 
part  of  their  sovereignty,  and  in  consequence  the  adminis- 
tration of  their  treasury  departments  was  largely  shaped  by 
national  ideas.  It  is  for  this  reason  that  the  first  period  of 
local  indebtedness  records  nothing  of  interest  to  the  present 
comparison.  The  States  did  not  again  come  forward  as  bor- 
rowers of  money  until  about  1830.  The  development  of  the 
railroad  system,  which  has  since  revolutionized  all  industrial 


COMPARISON  OF  LOCAL  WITH  NATIONAL  DEBTS. 


301 


methods,  had  at  this  time  just  begun,  and  it  was  not  then  be- 
lieved that  private  enterprise  "was  adequate  to  the  extensive  de- 
mands of  the  pubhc  for  highways  of  inland'  commerce.  The 
wildest  expectations  were  entertained  respecting  the  efficacy 
of  public  improvements,  and,  under  the  pressure  of  speculative 
excitement  thus  engendered,  the  States  were  forced  to  under- 
take business  enterprises  upon  the  basis  of  borrowed  money. 
This  period  of  excitement  will  receive  detailed  attention 
in  the  following  chapter ;  for  the  present  is  it  adequate  to 
notice  that  public  banking  and  public  improvements  left 
upon  the  States  a  burden  of  debt  from  which  many  of  them 
only  escaped  through  financial  disgrace.  The  amount  of  this 
debt  in  1842,  as  also  its  character  and  residence,  is  sliown  by 
the  figures  in  the  following  table : 

Table  showing  the  amount  of  debt  resting  upon  the  States  in 
18Jf2,  and  the  purposes  for  which  it  was  incurred. 


Public  and  in- 
ternal improve- 
ments. 

Banking. 

Miscella- 
neous. 

Total. 

Maine 

$4,Y05,666 

21,727,267 

31,186,130 

14,098,854 

6.193,161 

3,350,000 

1,309,760 

i, 200,066 

3,085,000 

1,198,166 

5,420,000 

10,924,123 

11,751,000 

10,371,294 

20,000 

$458,167 
137,704 

15,400,666 

20,200,000 

7,000,000 

2,676,000 

2,006,606 

1,006,666 

3,034,998 

389,261 

3,900,000 

$1,319,137 

70,000 

5,149,914 

1,115,907 

343,039 

2,203,530 

2,535,600'' 

'  191,666 

121,600 
433,000 
100,000 

$1,734,861 

5,424,137 

21,797,267 

36,336,044 

15,214,761 

6,994,307 

6,691,234 

1,309,750 

15,400,000' 

23,985,500 

Massachusetts 

New  York 

Pennsylvania 

Maryland 

Virginia 

South  Carolina 

Georgia 

Alabama 

Louisiana 

Mississippi* 

Arkansas 

7,000,000 
2,676,000 
3,085,000 

Kentucky 

Tennessee 

3,198,166 

Michigan 

Ohio 

5,611,000 
10,924,123 

Indiana 

12,751,000 

13,527,292 

842,261 

4,000,000 

1,316,030 

Illinois 

Missouri 

Territory  of  Florida. . . 
District  of  Columbia . . 

*  Of  this  amount,  $5,000,000  are  liabilities,  the  remainder  direct  indebtedness. 
'  Of  this  amount,  $2,000,000  was  loaned  to  a  planters'  association. 

*  No  public  works  authorized,  but  dividends  on  bank  stock  were  assigned  to 
internal  improvements  and  education. 


302  LOCAL  DEFICIT  FINANCIERING. 

From  the  facts  whicli  this  table  displays,  it  appears  that 
the  cotton-  and  tobacco-growing  States  expressed  a  decided 
preference  for  public  banking,  while  the  grain-  and  metal- 
bearing  States  favored  the  building  of  canals  and  railroads. 
One  may  not,  however,  on  this  account,  conclude  that  public 
sentiment  in  the  I^orth  respecting  banking  questions  was 
more  highly  educated  than  in  the  South,  for  the  fact  is  that 
during  this  period  the  people  of  the  North  were  provided 
with  all  the  paper  money  they  could  desire.  The  Southern 
States  did  not  so  strongly  feel  the  need  of  railroads  and  ca- 
nals, for  the  nature  of  their  produce,  and  the  character  of 
their  industrial  society,  did  not  suggest  the  necessity  of  rapid 
inland  communication.  They  regarded  it  as  much  more  de- 
sirable to  furnish  the  planter  with  "  capital "  for  the  adoption 
of  better  methods  in  the  culture  of  cotton,  and  to  this  end 
they  establishe'd  banks,  or  guaranteed  the  payment  of  notes 
issued  by  private  associations.  On  the  other  hand,  the  great 
majority  of  the  Northern  States  seem  to  have  been  com- 
pletely mastered  by  the  enthusiasm  for  public  improvements. 
New  York  led  the  way  by  building  the  Erie  Canal,  and  Penn- 
sylvania and  Maryland  quickly  followed,  in  order  to  protect 
their  local  interests.  The  lake  States,  also,  desiring  to  avail 
themselves  of  the  benefits  arising  from  direct  communication 
with  the  Atlantic  seaboard,  and  to  open  all  parts  of  their 
territory  to  rapid  settlement,  adopted  a  similar  policy. 
Other  States,  as,  for  example,  Kentucky  and  Tennessee, 
having  no  need  for  either  cotton-banks  or  canals,  but  being 
influenced  by  the  general  enthusiasm  for  public  improve- 
ments, set  about  building  turnpikes  and  toll-roads. 

It  appears,  then,  that  the  debts  contracted  by  the  States 
between  1830  and  1850  differ  somewhat  from  those  consid- 
ered in  the  former  part  of  this  essay.  Not  only  were  the 
bonds  issued  for  a  different  purpose,  but  it  was  supposed  that 
they  would  rest  for  their  extinction  upon  a  different  fund ; 
and  from  this  it  must  follow  that  the  rules  appropriate  to 
the  management  of  the  Federal  Treasury  do  not  apply  in  all 
strictness  to  local  financiering. 


COMPARISON  OF  LOCAL  WITH  NATIONAL  DEBTS.         303 

Since  1850,  the  history  of  the  treasury  operations  of  the 
States  presents  little  of  importance  to  the  student  of  finance. 
The  amount  of  their  indebtedness,  less  sinking-fund  ac- 
cumulations, was,  in  1880,  as  follows  : 

Eastern  States $35,207,482 

Middle  States 37,575,110 

Southern  States 123,803,235 

Western  States 37,671,256 

Pacific  States » 179,178 

Taking  into  consideration  what  we  know  of  the  relative 
wealth  of  the  sections  here  represented,  it  appears  that  the 
only  considerable  sum  of  debt  Hes  upon  the  Southern  States, 
nor  is  this  so  large  but  that  the  entire  amount  might  be 
wiped  out  by  a  moderate  taxing-policy  vigorously  applied. 
This  debt  was  created  for  the  most  part  during  a  period  of 
bad  government. 

The  general  fact  with  regard  to  the  States  seems  to  be 
that,  at  the  present  time,  they  possess  no  financial  standing. 
They  never  appear  upon  the  market  as  borrowers  of  large 
amounts  of  capital,  for  their  administrative  activity  has  been 
so  restricted  as  to  render  this  unnecessary.  Duties  which 
they  once  performed  have  passed  either  to  the  Federal  gov- 
ernment, as  in  the  case  of  banking,  or  to  private  corporations, 
as  in  the  case  of  railroads.  The  questions  of  organization 
and  administration  suggested  by  this  state  of  affairs  are  cer- 
tainly of  importance,  and  all  that  follows  bearing  upon  the 
history  of  local  indebtedness  may  be  regarded  as  leading  to 
their  solution. 

If  now  our  attention  be  turned  to  the  cities  and  minor 
civil  divisions,  the  same  necessity  for  special  and  detailed 
study  will  present  itself.  The  purposes  for  which  municipali- 
ties have  employed  their  public  credit  are  peculiar  to  the 
position  which  they  hold  in  the  general  structure  of  govern- 
ment, and  the  rules  by  which  their  treasuries  should  be 
managed  are  shaped  by  the  peculiar  duties  imposed.  The 
totals  of  local  indebtedness  for  certain  significant  years  are 

'  Porter's  "Special  Report  on  Public  Debts,"  p.  522. 


304 


LOCAL  DEFICIT  FINANCIERING. 


given  in  the  table  below.  The  States,  wbicli  began  to  as- 
sume obligations  in  1830,  found  themselves  most  heavily 
burdened,  wealth  and  population  being  taken  into  the  ac- 
count, in  1842 ;  but  at  this  date  the  cities  were  comparatively 
free  from  debt,  while  the  minor  civil  divisions  had  not  yet 
made  such  use  of  their  public  credit  as  to  attract  general  at- 
tention. For  the  year  1880,  the  amounts  presented  in  the 
tables  are  net  indebtedness ;  for  the  previous  dates  no  such 
careful  estimate  has  been  made  to  secure  accuracy  of  state- 
ment. It  is  further  necessary  to  notice  that  for  the  ye|ir8 
1870  and  1880  the  debt  of  townships  and  school-districts  is 
included  under  the  heading  of  city  obligations. 

Table  shoiomg  the  relative  growth  of  State  and  municipal 

debts} 


1S42. 

1S70. 

ISSO. 

State  debts 

$198,800,000 
27,500,000 

$352,800,000 
328,250,000 
187,500,000 

$234,430,000 

City  debts 

698,270,000 

County  debt 

123,870,000 

The  important  feature  of  this  table  is  the  change  in  the 
balance  of  indebtedness  which  its  figures  portray.  While 
the  States  have  in  large  measure  retired  from  the  market  as 
borrowers  of  money,  the  municipalities  have  increased  the 
frequency  and  extent  of  their  demands.  It  is  true  that  the 
total  per  capita  debt  of  both  together  was  not  as  large  in 
1880  as  in  1870,  being  $23  in  the  earlier  period,  and  $21  in 
the  latter,  but  the  proportion  of  this  sum  for  which  the 
cities  are  responsible  is  greatly  increased. 

But  for  what  purposes  did  the  municipal  corporations  in- 
cur their  obligations  ?  For  an  answer  to  this  inquiry  we  are 
obliged  to  rely  upon  data  furnished  by  the  Census  Keport  of 
1880.  The  facts  desired  are  not  there  given,  but  it  is  possi- 
ble to  arrive  at  substantially  accurate  results  by  means  of  a 
simple  calculation  from  the  figures  furnished.    The  figures, 

'  Porter's  "  Special  Report  on  Public  Debts,"  p.  27. 


COMPARISON  OF  LOCAL  WITH  NATIONAL  DEBTS. 


305 


upon  whicli  this  calculation  proceeds,  as  well  as  the  results 
derived,  are  presented  in  the  following  table : 

Table  showing  amount  of  bonded  debt  in  1880,  for  States, 
cities,  and  minor  civil  divisions,  and  purposes  for  which 
bonds  were  issued.^ 


PUEPOSE  FOR  "WHICH 

LOCAL  DEBTS  WEEE 

CONTEACTED. 

State  and  local 

iDdebtedness,  as 

given  in  census 

of  1880. 

Indebtedness 
of  cities  with 
population  of 
7,500  and  up- 
ward, as  ^v- 
en  in  census 
of  1880. 

Indebtedness 
of  States,  as 
computed 
from  balance- 
sheets  of 
States. 

Indebtedness 
of  towns  and 
minor  civil 
divisions, 
computed 
from  the 
foregoing. 

Bridges 

$24,853,388 

283,816 

2,514,082 

40,612,536 

21,370,536 

86,674,860 

146,423,565 

75,154,400 

153,949,095 

138,743,730 

48,493,952 

185,638,948 

36,224,548 

26,509,457 

130,374,758 

$20,809,431 

272,912 

2,214,924 

40,490,636 

21,335,434 

81,502,817 

141,797,828 

28,722,787 

122,864,804 
71,071,140 
25,516,829 
68,309,493 

16,726,064 
13,889,915 
26,571,446 

$682,096,460 

$33,310,738 

2,978,048 
57,057,862 

6,327,780 
47,984,090 

8,655,780 

90,000,060 

$4,043,957 

Cemeteries 

10,904 

Fire  department 

Public  parks 

299,158 
121,900 

Sewerage 

35,102 

Streets 

5,172,043 

Water-works 

4,625,737 

Bounties,  militia,  war . 
Funding  of  floating 
debts 

13,120,875 
28,106,243 

Refunding  old  debt . . . 

Public  buildings 

Railroads 

Canals,  rivers,  water- 
power 

10,614,728 
16,649,343 
69,345,365 

10,842,704 

Schools  and  libraries . . 
Miscellaneous 

12,619,542 
13,803,312 

Total 

$1,117,821,671 

$246,314,298 

$189,410,913 

There  are  many  significant  items  in  the  foregoing  table. 
For  example,  the  assistance  granted  to  raiboads  suggests  a 
line  of  study  that  demands  a  comprehensive  investigation  of 
the  entire  subject  of  internal  improvements  in  the  United 
States.  Another  point  of  interest  is  the  excessive  use  made 
by  municipalities  of  floating  obhgations.  Cities  have  no 
business  to  create  floating  debts,  and  yet  over  $150,000,000 
of  their  obhgations  are  traceable  to  this  source.'  Or,  revert- 
ing again  to  the  question  of  the  balance  of  indebtedness,  the 

'  This  table  is  compiled  from  Porter's  "  Special  Report  upon  Public  Debts  "  ; 
and  on  this  account  its  figures  are  slightly  different  from  those  found  in  the 
seventh  volume  of  the  Tenth  Census. 

*  This  includes  $28,000,000  of  debt  yet  afloat. 


306  LOCAL  DEFICIT  FINANCIERING. 

foregoing  table  shows  that  the  employment  of  credit  by  the 
larger  cities  is  greatly  in  excess  of  its  use  by  the  minor  civil 
divisions.  There  are  in  the  United  States  some  three  hun- 
dred first-class  cities,  containing  about  one-fourth  of  the 
total  population  of  the  country;  but  their  indebtedness  is 
$682,000,000  as  against  $189,000,000  borne  by  the  other 
municipal  corporations.  These  are  indeed  startling  figures 
and,  when  understood,  disclose  certain  dangerous  tendencies 
in  the  development  of  local  administration ;  but  since  it  is 
the  purpose  of  the  remainder  of  tliis  treatise  to  interpret  the 
facts  thus  disclosed,  we  need  not  dwell  longer  upon  them  at 
the  present  time. 

Convparison  of  the  Rules  of  Local  and  National  Deficit 
Financiering. 
It  remains  to  inquire  how  far  the  general  principles  of 
national  financiering  may  be  followed  in  the  administration 
of  local  affairs.  It  is  quite  clear  that  these  principles  must 
be  subject  to  some  modification,  for  rules  of  deficit  financier- 
ing spring  in  large  measure  from  the  conditions  under  which 
debts  are  contracted,  and  these  conditions  are  shaped  by  the 
purposes  for  which  appeal  is  had  to  credit.  From  a  survey 
of  the  items  mentioned  in  the  foregoing  table,  it  seems  that 
the  debts  resting  upon  the  cities  and  minor  civil  divisions  are 
capable  of  a  three-fold  classification.  In  the  first  class  are 
included  those  debts  incurred  for  the  purpose  of  rendering  a 
direct  though  a  general  service  to  the  public.  The  building 
of  highways ;  the  maintenance  of  a  fire  department ;  the 
construction  of  sewerage,  and  the  like,  are  examples  of  such 
services.  The  second  class  includes  those  debts  incurred  for 
the  purpose  of  rendering  a  direct  service  to  the  public,  but  of 
a  particular  rather  than  a  general  character.  This  division 
comprises  such  services  as  the  supply  of  water,  or  gas,  or 
heat,  to  the  citizens  of  a  municipal  corporation.  The  pur- 
chase of  cemetery-grounds  for  resale  to  individuals  would 
also  be  included  in  this  class.  The  third  kind  of  local  in- 
debtedness arises  when  the  governing  body  employs  its  pub- 


COMPARISON  OF  LOCAL  WITH  NATIONAL  DEBTS.         307 

lie  credit  for  granting  assistance  to  private  corporations,  be- 
lieving thereby  to  serve  the  public  indirectly  through  the 
industries  established. 

All  of  these  classes  of  debts  have  certain  characteristics 
in  common  which  distinguish  them  from  debts  contracted 
for  national  purposes.  One  important  point  of  contrast  per- 
tains to  the  nature  of  the  demands  for  which  money  is  bor- 
rowed. When  the  Federal  government  appears  upon  the 
market,  the  demand  for  increased  revenue  is  usually  sudden 
and  extensive,  and  of  such  a  sort  that  no  safe  estimate  can  be 
made  of  the  amount  needed.  This  is  not  true  in  the  case 
of  the  minor  civil  divisions.  Local  financiering  is  entered 
upon  with  foresight,  and  not  under  the  stress  of  any  emer- 
gency. It  follows  from  this  that  common  business  maxims 
may  be  more  closely  observed,  and  general  political  and  in- 
dustrial considerations  less  strenuously  regarded.  A  local 
council  partakes  more  nearly  of  the  character  of  the  govern- 
ing board  of  a  corporation  than  is  the  case  vvith  the  Cabinet 
of  the  Federal  government.  For  similar  reasons,  also,  the  de- 
fense of  local  debts  is  different  from  that  of  national  debts. 
A  city  or  a  town  can  not  possibly  urge  the  plea  of  impera- 
tive necessity.  It  is  true  that  some  great  disaster,  as  fire  or 
flood,  may  incline  the  local  authorities  to  render  immediate 
assistance  to  those  citizens  who  are  subjects  of  misfortune ; 
but  this  desire  can  not  be  reflected  in  the  record  of  indebted- 
ness, since  bonds  issued  for  such  purposes  would  be  held  in- 
valid by  the  courts.  The  only  defense  of  local  borrowing 
rests  upon  the  common-sense  principle  of  payment  by  install- 
ments. A  revenue  law  that  makes  sudden  and  rapid  changes 
in  the  rates  of  taxation  is  the  occasion  of  unnecessary  in- 
convenience and  vexation,  and,  notwithstanding  the  rise  of 
extraordinary  demands,  the  evils  attending  such  arbitrary 
changes  may  be  easily  avoided  by  a  resort  to  credit.  If,  for 
example,  a  court-house  or  a  city-hall  is  to  be  erected,  it  is  of 
common  advantage  that  the  people  who  are  called  upon  to 
foot  the  bills  should  be  permitted  to  distribute  their  con- 
tributions over  several  years. 


308  LOCAL  DEFICIT  FINANCIERING. 

A  further  distinction  is  suggested  when  it  is  noticed  that 
the  national  financier  is  forbidden  to  calculate  upon  any  in- 
come that  may  arise  from  the  manner  in  which  the  proceeds 
of  a  loan  may  be  expended,  and  that  he  is  in  consequence 
obliged  to  rely  upon  taxes  for  the  support  of  the  debt.^  But 
in  contrast  with  this,  it  frequently  occurs  that  local  authori- 
ties undertake  productive  industries  and  derive  a  steady  in- 
come from  the  investment  of  moneys  borrowed.  Thus,  the 
proceeds  of  a  loan  are  said  to  be  spent  for  remunerative 
purposes  when  invested  in  such  a  manner  as  to  render  direct 
personal  service  to  citizens.  The  furnishing  of  gas,  or  of 
water,  or  of  heat,  are  illustrations  of  such  services.  In  cases 
of  this  sort,  the  burden  of  debt  is  thrown  upon  the  public 
industry  which  its  proceeds  establish,  and  its  support  and 
final  payment  are  assumed  to  rest  with  those  who  are  bene- 
fited by  the  service  in  proportion  to  the  benefit  received. 
For  example,  it  is  the  common  practice  for  water-works  to  be 
supported  by  water-rates ;  and  it  conforms  fully  to  the  require- 
ments of  finance  that  these  rates  should  be  so  adjusted  as 
to  pay  for  the  plant  independently  of  taxation,  except  so  far 

'  The  query  may  arise  if  bonds  issued  for  territorial  purchases  do  not  form 
an  exception  to  this  statement.  Why  may  not  land-bonds  be  provided  for  out 
of  the  proceeds  of  the  sale  of  land  ?  This  might  be  possible  under  some  cir- 
cumstances. If  the  land  were  already  under  cultivation,  or  if  the  government 
should  purchase  it  with  a  view  of  going  into  the  business  of  forestry,  it  might 
be  desirable  to  pay  the  debt  created  out  of  the  proceeds  of  the  property  ;  but 
according  to  the  land  policy  adopted  in  the  United  States,  the  financier  is  forbidden 
such  calculations.  Indeed,  a  loan  for  the  purpose  of  purchasing  large  tracts  of 
wild,  uncultivated  land  must  primarily  rest  upon  taxes,  because  such  land  can 
only  be  sold  as  they  are  gradually  absorbed  by  advancing  population.  The 
treasury  figures  show  this  to  have  been  true  in  the  case  of  the  Louisiana  purchase. 
The  total  amount  of  six-per-cent  stock  which  it  was  found  necessary  to  create 
for  payment  to  France  was  $11,250,000  [Bayley's  "National  Loans,"  p.  120]. 
This  stock  was  issued  in  1804.  Payment  upon  it  was  begun  in  1812,  and,  with 
the  exception  of  about  $8,000,  the  entire  debt  was  expunged  in  1821.  If  now  a 
date  as  late  as  1825  be  taken,  it  appears  that  the  total  gross  revenue  from  sale 
of  lands  lying  within  the  French  cession  was  but  $2,286,220  [Johnson's 
"  Report  on  the  Relief  of  the  States,"  p.  324].  There  seems  to  have  been  no 
difference,  then,  so  far  as  taxes  are  concerned,  between  this  financial  oper- 
ation and  the  borrowing  of  money  for  purposes  of  war. 


COMPABISOl^  OF  LOCAL  WITH  NATIONAL  DEBTS.         309 

as  the  city  is  itself  a  consumer.  Such  a  method  of  treasury 
management,  which  leads  to  the  assignment  of  specific  funds 
to  specific  services,  is  not  common  in  national  financiering. 
But  in  local  affairs,  the  principle  thus  disclosed  is  one  of 
wide  application,  and  modifies  in  a  marked  degree  the  gen- 
eral rules  for  the  administration  of  local  debts. 

Passing,  however,  from  such  general  distinctions,  one 
may  easily  observe  certain  technical  differences  in  the  ad- 
ministration of  a  local  and  a  national  debt,  arising  from  the 
varying  conditions  under  which  credit  is  employed.  The 
most  important  of  these  pertain  to  the  use  of  sinking-funds, 
tax-loans,  and  floating  debts,  as  well  as  to  those  measures 
which  make  provision  for  the  future  conversion  of  public 
funds.  Those  rules  peculiar  to  local  financiering  thus  sug- 
gested are  as  follows.  The  administrator  of  local  finances  is 
permitted  to  found  a  sinking-fund  at  the  time  of  issuing 
bonds,  a  permission,  it  will  be  remembered,  contrary  to  sound 
rules  of  national  financiering.  The  same  may  be  said  of  the 
employment  of  tax-loans,  although  the  reasons  against  the 
use  of  such  obligations  by  a  Federal  financier  are  not  so 
strong  as  in  the  case  of  sinking-funds.  Temporary  debts,  on 
the  other  hand,  are  regarded  as  necessary  for  governments 
imposed  with  the  duty  of  caiTying  through  a  war,  or  of 
meeting  sudden  fiscal  emergencies ;  but  in  local  affairs  there 
is  nothing  which  testifies  so  unmistakably  to  fiscal  incapacity 
as  the  existence  of  large  floating  debts.  And,  lastly,  the 
thought  of  an  ultimate  conversion  of  the  funds,  which  may 
properly  influence  the  drawing  of  a  Federal  contract,  can 
modify  but  slightly  the  form  of  municipal  bonds. 

All  these  rules  spring  from  the  fact  that  the  purposes  for 
which  local  governments  may  properly  contract  debts  do  not 
demand  obhgations  running  for  a  long  series  of  years.  It 
is  of  even  greater  importance  for  the  municipal  than  for 
the  national  administrators  to  remember  that  public  credit  is 
simply  a  means  for  anticipating  clear  revenue.  The  princi- 
ples of  perpetual  indebtedness  may  properly  give  direction  to 
a  Federal  policy,  because  the  extent  of  extraordinary  Federal 
21 


310  LOCAL  DEFICIT  FINANCIERING. 

demands  is  frequently  uncertain,  and  the  time  of  their  oc- 
currence is  altogether  beyond  the  control  of  the  govern- 
ment ;  but  in  local  concerns,  the  occasion  for  resort  to  public 
credit  is  wholly  a  matter  of  choice,  and  reliance  may  be  had 
upon  calculations  of  expenditure  and  upon  estimates  of  in- 
come. It  is  this  fact  that  modifies  the  general  rules  of 
finance  when  credit  is  employed  by  the  officials  of  minor 
civil  divisions.     Let  us  consider  this  more  closely. 

The  attachment  of  a  sinking-fund,  for  example,  to  a  loan- 
bill,  when  the  proceeds  of  the  loan  are  to  be  expended  for 
war  purposes,  is  useless,  to  say  the  least,  because  the  extent 
of  the  demand  can  not,  from  the  nature  of  the  case,  be  known. 
Such  a  procedure  involves  the  absurdity  of  borrowing  money 
with  which  to  pay  an  old  debt,  while  yet  under  the  necessity 
of  employing  credit  to  meet  new  expenditure.  But  in  local 
affairs,  early  provision  for  the  payment  of  a  debt  is  evidence 
of  sound  business  principles.  All  the  facts  bearing  upon  the 
question  are  known  to  the  authorities  when  they  determine 
to  borrow  money,  and  there  is  consequently  no  reason  why 
they  should  not  make  adequate  provision  for  expunging  a 
debt  at  the  time  it  is  created.  This  may  be  the  more  readily 
recognized  if  we  call  to  mind  the  three  conflicting  interests 
which  may  be  harmonized  by  the  employment  of  local  credit. 

The  first  of  these  is  the  engineering  interest,  which  de- 
mands that  public  works  once  begun  should  be  carried  on  as 
rapidly  as  possible  to  their  completion,  and  this  can  only  be 
done  by  assured  control  over  a  large  sum  of  money.  The 
second  is  the  financial  interest,  which  regards  it  as  essential 
that  tax-rates  shall  not  be  subject  to  sudden  fluctuations. 
The  third  is  what  may  be  termed  the  general  social  interest, 
which  stands  opposed  to  the  perpetuation  of  local  debts.  So 
far  as  the  first  two  of  these  interests  are  concerned,  the  at- 
tachment of  a  sinking-fund  clause  to  a  debt-contract  is  of  no 
particular  importance ;  but  since  quick  and  certain  payment 
is  demanded  by  considerations  of  general  welfare,  and  since 
neither  the  engineer  nor  the  tax-assessor  can  object  to  an 
early  provision  for  payment,  such  provision  must  be  accepted 


COMPARISON  OF  LOCAL  WITH  NATIONAL  DEBTS.         311 

as  an  essential  requirement  for  tlie  management  of  a  local 
debt.  The  same  line  of  argument  might  be  used  with  regard 
to  tax-loans,  a  form  of  credit  that  can  not  be  employed  in 
any  marked  degree  when  the  extent  of  extraordinary  demands 
may  not  be  estimated  with  safety.  Indeed,  there  is  no  dif- 
ference in  principle  between  a  tax-loan  and  a  loan  with  a 
sinking-fund  attachment. 

There  is  also  an  additional  reason  why  a  law  authorizing 
the  issue  of  local  bonds  should  contain  a  provision  for  the  es- 
tablishment of  a  sinking-fund.  It  will  be  remembered  that 
cities  and  minor  civil  divisions  are  inferior  and  dependent 
governments,  and  that  their  officers  are  subject  to  the  juris- 
diction of  the  courts  to  the  extent  that  laws  which  exist  must 
be  executed.  If  now  a  sinking-fund  be  created  by  the  law 
that  creates  the  debt,  a  public  creditor  has  an  assured  and  an 
easy  method  of  securing  payment  upon  valid  obligations. 
It  does  not  follow  that  the  creditor  would  always  enforce  his 
right  should  the  sinking-fund  payments  be  passed,  but  the 
fact  that  it  lies  within  his  power  to  do  so  gives  an  additional 
value  to  the  obligations,  and  consequently  an  additional  ad- 
vantage to  the  municipality  in  the  placement  of  its  bonds. 
This  consideration  does  not  apply  to  the  Federal  govern- 
ment, nor  at  the  present  time  to  the  State  governments, 
because  they  are  both  sovereign  for  debt  purposes,  and  the 
only  security  which  it  is  possible  for  their  bonds  to  offer  is 
the  good  will  of  their  legislative  bodies. 

The  general  evils  attending  an  excessive  use  of  floating 
obligations  have  been  already  pointed  out,  and  it  is  only 
necessary  to  add,  in  this  connection,  that  the  alternatives 
which  sometimes  demand  their  employment  by  the  national 
financier  can  never  arise  for  local  administrators.  The  only 
defense  of  a  floating  debt  is  the  fact  that  an  administration  is 
surprised  with  sudden  demands  which  can  not  wait  the  sale 
of  ordinary  obligations ;  but  such  a  surprise  can  not  present 
itself  to  the  local  financier,  who  himself  determines  the  occa- 
sion and  extent  of  fiscal  demands.  As  has  been  frequently 
remarked,  local  financiers  have  nothing  to  do  with  emergen- 


312  LOCAL  DEFICIT  FINANCIERING. 

cies.  Still,  one  can  not  conclude  from  tliis  tliat  city  and 
county  warrants,  certificates  of  indebtedness,  and  such  like 
temporary  paper,  should  never  be  employed.  Such  instru- 
ments of  credit  may  or  may  not  constitute  a  floating  debt, 
according  as  they  are  or  are  not  assigned  to  some  assured 
revenue.  If  a  definite  amount  of  clear  income  be  appropri- 
ated to  their  payment,  common  warrants  are  properly  classed 
as  tax-loans  and  not  as  floating  debts,  and  their  convenience 
in  treasury  administration  commends  their  use.  That  which 
is  here  condemned  is  that  looseness,  so  frequently  to  be  ob- 
served in  the  management  of  city  accounts,  which  leads  to 
the  settlement  of  claims  by  the  issue  of  warrants  and  certifi- 
cates. The  funding  of  such  paper  must  come  sooner  or  later, 
and  the  city  that  thus  postpones  the  liquidation  of  its  ac- 
counts is  sure  to  become  embarrassed. 

It  follows,  likewise,  from  the  reasons  abeady  given,  that 
the  policy  of  local  indebtedness  need  not  be  shaped  with  a 
view  to  "ultimate  conversion.  Conversion  of  a  public  debt 
means  such  a  modification  of  the  contract  as  to  secure,  before 
its  final  payment,  more  favorable  terms  than  those  originally 
entered  into.  In  the  case  of  national  financiering  this  is  of 
great  importance,  because  the  conditions  under  which  money 
is  borrowed  are  commonly  such  that  the  government  is 
obliged  to  accede  to  severe  terms.  A  state  of  war,  for  ex- 
ample, is  unfortunate  for  the  borrowing  of  money,  and  with- 
out any  change  whatever  in  the  industrial  relations,  tlie  return 
of  peace  will  give  a  government  control  over  capital  at 
cheaper  rates  than  it  was  obliged  to  pay  during  the  continu- 
ance of  hostilities.  But  this  can  not  apply  to  local  finan- 
ciering, for  a  local  government  is  at  liberty  to  select  the  most 
opportune  times  for  the  sale  of  its  bonds,  and  consequently 
it  need  never  suffer  the  expense  of  high  rates  of  interest  to 
overcome  the  risk  of  investment.  So  far  as  the  rate  of  in- 
terest is  dependent  upon  risk,  a  municipal  council  may  cen- 
sure itself  if  that  rate  be  not  as  low  when  a  debt  is  created 
as  after  several  years  shall  have  elapsed. 

Again,  in  the  administration  of  national  affairs,  it  may  be 


COMPARISON  OF  LOCAL  WITH  NATIONAL  DEBTS.         313 

necessary  to  contract  a  debt  of  sucli  magnitude  that  it  can 
not  be  expunged  before  tlie  natural  development  of  commer- 
cial relations  shall  have  reduced  the  rate  for  which  money 
may  be  secured ;  and  from  this  it  follows  that  the  thought  of 
ultimate  conversion  should  be  always  kept  prominently  in 
view.  But  this  reasoning  can  not  apply  to  local  borrowing, 
for  local  debts  should  never  cover  periods  so  extended  that 
industrial  changes  can  materially  modify  the  value  of  money 
while  specific  obligations  continue  to  run.  The  purposes 
for  which  municipalities  borrow  do  not  require  that  their 
obligations  should  long  remain  in  the  hands  of  creditors.  It 
may  be  that  those  conditions  justifying  an  appeal  to  credit 
will  constantly  recur  in  the  course  of  local  administration,  so 
that  the  local  government  will  not  be  freed  from  debt  for  a 
long  series  of  years;  but  it  will  be  a  debt  constantly  in 
course  of  expungement,  and  in  this  manner  whatever  advan- 
tage arises  from  a  gradual  fall  in  the  rate  of  interest  can  be 
secured  to  municipalities.  In  local  financiering,  new  bor- 
rowing secures  money  for  new  purposes,  while  existing  taxes 
expunge  old  debts ;  in  national  financiering,  conversion  im- 
plies the  employment  of  fresh  credit  in  order  to  pay  off  exist- 
ing debt  for  the  purpose  of  obtaining  better  terms — but  in 
either  case  the  governing  bodies  reap  an  advantage  from 
constantly  falling  interest. 

The  accuracy  of  what  has  been  said  may,  perhaps,  be 
more  clearly  discerned  in  the  reflected  light  of  another  dis- 
tinction. Those  considerations  that  determine  the  time  at 
which  the  payment  of  debts  should  begin,  as  also  the  rate 
at  which  it  should  proceed,  are  quite  different  for  national 
and  local  financiering.  The  point  at  which  the  two  policies 
diverge  is,  that  in  the  one  case  money  is  borrowed  for  gen- 
eral and  in  the  other  for  particular  pm'poses.  When  a  debt 
is  contracted  for  a  general  purpose,  as  is  the  case  in  time  of 
war,  it  is  conceived  to  rest  upon  the  combined  industries  of 
the  country,  and  questions  pertaining  to  payment  are  deter- 
mined by  the  state  of  trade.  This  subject  has  been  already 
discussed  in  a  foregoing  chapter.    Most  local  debts,  on  the 


314  LOCAL  DEFICIT   FIXANCIEEING. 

other  hand,  are  contracted  for  some  definite  purpose,  and 
their  proceeds  are  employed  in  such  a  manner  as  to  establish 
in  the  community  some  particular  form  of  public  service  ; 
it  is  natural,  therefore,  that  the  expungement  of  a  local  debt 
should  conform  to  the  manner  in  which  its  funds  were  in- 
vested. As  an  illustration,  supj)Ose  capital  to  be  borrowed 
for  the  purpose  of  paving  streets  or  of  providing  sewerage, 
the  service  thus  rendered  is  common  to  all  members  of  the 
community,  but  of  such  a  nature  that  the  debt  must  rest 
upon  taxes.  But  what  is  of  yet  more  importance,  the  lo(ial 
council  can  not  proceed  as  though  the  city  would  never  be 
called  U23on  to  repeat  its  expenditure,  for  pavements  and  sew- 
erage are  subject  to  wear,  and  must  sooner  or  later  be  re- 
placed by  new  systems.  From  this  it  must  appear  that  the 
payment  of  a  local  debt  is  not  to  be  determined  by  the  gen- 
eral industrial  conditions  of  the  country,  but  that  sound  pol- 
icy demands  the  expungement  of  existing  obligations  be- 
fore the  public  authorities  find  it  necessary  to  borrow  fresh 
capital  for  new  improvements.  It  seems,  then,  that  the  rap- 
idity with  which  such  payments  should  be  made  depends 
upon  the  probable  life  of  the  pavement  or  the  sewerage,  and 
this  is  a  question  that  must  be  determined  by  tlie  city  en- 
gineer. 

Similar  reasoning  applies,  only  in  a  more  marked  degree, 
if  the  proceeds  of  a  debt  are  employed  to  establish  remu- 
nerative public  works,  for  in  such  a  case  the  income  from  the 
public  industry  established  is  supposed  to  support  the  debt. 
With  regard  to  gas-works  and  water-works,  for  example,  gen- 
eral business  rules  may  be  appropriately  applied  for  the  re- 
imbursement of  capital  sunk.  Such  debts  should  be  paid  as 
rapidly  as  the  interests  of  consumers  will  bear,  so  that  the 
property  may  become  an  unincumbered  property  to  the  com- 
munity. There  are  other  conditions,  however,  in  which 
these  rules  of  payment  may  be  somewhat  modified.  In  the 
case  of  purchasing  real  estate  for  public  parks,  or  of  lending 
assistance  to  railroads  or  other  private  enterprises,  the  policy 
that  should  direct  a  local  treasury  is  more  nearly  akin  to  that 


COMPARISON  OF  LOCAL  WITH  NATIONAL  DEBTS.         315 

followed  by  tlie  national  financier.  The  reason  is  that  these 
measures  are  conceived  to  be  exceptional  rather  than  con- 
stantly recurring.  The  real  estate  of  a  park,  which  at  fiirst 
may  cost  a  large  sura  of  money,  is  an  investment  the  value  of 
which  is  not  depreciated  by  time  and  use ;  the  benefits  sup- 
posed to  arise  from  enlarged  commercial  facilities  are  also  of 
a  permanent  nature.  It  follows  that  the  payment  of  such 
debts  may  properly  extend  over  a  longer  period,  and  for  two 
reasons.  The  fact  that  the  investment  is  permanent  obviates 
the  necessity  of  clearing  accounts  before  a  similar  expendi- 
ture of  fresh  money  is  required.  But  of  more  importance 
is  the  demand  that  the  rate  of  taxation  shall  not  be  changed 
with  unnecessary  rapidity.  If,  for  example,  it  were  under- 
taken to  pay  for  a  park  purchased  in  four  or  five  years,  there 
would  be  an  unnecessary  burden  entailed  upon  the  commu- 
.nity,  first,  by  the  rapid  rise  in  tax-rates,  and  second,  by  the 
rapid  fall  in  tax-rates  after  the  payment  had  been  accom- 
plished. It  is  true  that  this  is  not  of  so  much  importance  in 
local  taxation,  where  impositions  are  for  the  most  part  direct, 
as  in  the  case  of  Federal  taxes,  where  reliance  is  had  upon 
indirect  contributions ;  but  it  yet  applies,  and  from  it  one 
may  conclude  that  a  two-  or  a  three-per-cent  sinking-fund 
provides  for  the  extinction  of  such  debts  with  sufficient 
rapidity. 

It  has  been  the  purpose  of  the  present  chapter  to  clear 
the  ground  for  an  historical  study  of  local  indebtedness  in 
the  United  States.  By  means  of  the  analysis  which  it  pre- 
sents, we  have  discovered  the  relations  that  exist  between 
the  various  gTades  of  government  and  the  legal  character  of 
the  bonds  which  they  respectively  issue.  We  have  learned, 
also,  how  the  burden  of  indebtedness  has  been  shifted  as 
the  relative  importance  of  these  governmental  centers  has 
changed,  and  from  this  the  natural  classification  of  our  fur- 
ther study  has  been  suggested.  In  the  third  place,  our  anal- 
ysis has  brought  prominently  into  view  the  essential  differ- 
ences that  exist  between  the  employment  of  public  credit 
for  local  and  for  national  purposes,  so  far  as  these  are  trace- 


g^g  LOCAL  DEFICIT  FINANCIERING. 

able  to  tlie  peculiar  duties  imposed  upon  tlie  inferior  govern- 
ments and  to  the  conditions  under  whicli  they  are  obliged  to 
perform  them.  From  this  point,  then,  we  may  proceed  to 
consider  the  facts  of  local  indebtedness  more  in  detail,  and 
to  study  such  practical  questions  as  may  be  suggested. 


*. 


CHAPTEE  II. 

STATE   INDEBTEDNESS   BETWEEN    1830    AND    1850. 

"Were  it  our  purpose  to  present  a  complete  historical  ex- 
planation of  the  course  of  indebtedness  on  the  part  of  the 
American  commonwealths,  it  would  be  necessary  to  consider 
at  some  length  the  assumption  of  State  debts  by  the  Federal 
government  in  1790.  The  experience  of  the  States  from 
1830  to  1850  was  quite  different  from  what  it  would  have 
been  had  they  not  been  relieved  by  Congress  from  the  neces- 
sity of  providing  for  their  obligations  incurred  during  the 
Revolutionary  War.  But  so  closely  intertwined  is  the  influ- 
ence of  this  historical  fact  with  other  political  tendencies  work- 
ing in  the  same  direction,  that  it  would  be  difficult  to  trace  the 
causal  relation  thus  suggested.  Nor  does  this  seem  necessary 
to  our  present  purpose.  Accepting  the  position  of  the  com- 
monwealths in  1830  as  an  established  fact,  and  their  rights 
against  the  Federal  government  as  well  understood,  their 
subsequent  financial  liistory  is  fully  adequate  to  explain  why 
at  the  present  time  they  have  no  financial  standing ;  and  why, 
in  the  struggle  shortly  to  be  renewed  between  centralized 
power  and  local  government,  the  commonwealths  find  them- 
selves handicapped  with  certain  constitutional  restrictions 
which  their  citizens  have  unwisely  imposed.  It  is,  then,  this 
second  period  of  State  indebtedness  that  will  serve  as  the 
more  fruitful  subject  of  study. 

After  the  assumption  by  the  Federal  government  of  their 
local  obligations  in  1790,  the  States,  as  political  sovereignties, 
made  no  extensive  use  of  public  credit  previous  to  1820 ;  nor 


313  LOCAL  DEFICIT  FINANCIERING. 

was  it  until  some  twelve  or  fifteen  years  later  that  tliey  ap- 
pealed extensively  to  this  source  of  revenue.  How  extensive 
this  appeal  came  finally  to  be,  appears  from  the  figures  which 
show  the  growth  of  local  debts.  During  the  ten  years  fol- 
lowing 1820,  public  stocks  were  authorized  in  the  various 
States  to  the  amount  of  $26,000,000,  of  which  nearly  $18,- 
000,000  were  held  against  the  three  States,  New  York, 
Pennsylvania,  and  Ohio.  Between  the  years  1830  and  1835 
$40,000,000  more  were  added  to  the  obligations  of  the  States, 
while  the  three  years  previous  to  1838  witnessed  an  increase 
of  local  indebtedness  to  the  amount  of  $107,000,000.  The 
total  habilities  resting  upon  the  States  in  the  year  1843, 
including  both  direct  and  floating  debts,  and  loans  of  credit, 
reached  the  sum  of  $231,600,000.  These  figures,  it  is  true, 
may  not  appear  large  at  the  present  time,  accustomed  as  we 
are  to  speak  and  think  in  billions ;  but  at  that  day,  before 
the  system  of  public  debts  had  been  generally  developed, 
they  excited  the  alarm  of  all  citizens. 

The  purpose  for  which  the  States  employed  tlieir  public 
credit  has  been  suggested  in  a  previous  chapter.  Canals  and 
railroads  claimed  the  attention  of  the  North  ;  turnpikes  and 
banks  fiourished  in  the  South.  The  popular  enthusiasm  for 
"  modern  progress "  led  to  speculative  enterprises  of  all 
sorts.^  Grand  projects  for  internal  hnprovements  far  in 
advance  of  the  immediate  needs  of  the  country  were  set  on 
foot.  It  was  not  for  a  moment  thought  that  the  debts  thus 
created  would  be  the  occasion  for  an  increase  of  the  tax-levy, 
and  when,  the  means  of  the  States  exhausted,  it  was  discov- 
ered that  the  moneys  borrowed  must  be  paid  out  of  ordinary 
revenue,  the  public  was  filled  with  consternation.  The  popu- 
lation of  the  country  in  1843  was  about  seventeen  millions, 

'  An  American  comedy,  published  in  1846,  entitled  "Antipathies;  or,  the 
Enthusiasts  by  the  Ears,"  draws  an  amusing  picture  of  the  times.  Among  the 
characters  are  Jacob  Changeless,  a  mortal  enemy  of  modern  improvements ;  John 
Progress,  an  infinite  perfectibility  man  ;  and  Elihu  Go-ahead,  a  mighty  projector 
of  railways  and  all  internal  improvements. — "  American  Comedies,"  by  J.  K. 
Paulding,  Philadelphia,  1846. 


STATE  INDEBTEDNESS  BETWEEN   1830  AND   1850.         319 

while  the  annual  interest  charges  arising  from  State  debts 
was  $12,250,606.  It  was  then  that  the  word  "repudiation" 
crept  into  the  financial  vocabulary  of  the  American  people. 
The  reputation  of  the  country  abroad  also  seriously  suffered. 
"  America,"  says  a  writer  in  the  "  London  Times,"  "  is  not 
the  country  it  is  cracked  up  to  be ;  too  many  speculators  and 
gamblers — indeed,  to  be  plain,  I  look  upon  it,  from  Maine  to 
Florida,  as  one  vast  swindling  shop."  ^ 

It  must,  however,  be  remembered  that  a  swindler  is  im- 
possible without  some  one  who  is  willing  to  take  the  risk  of 
being  swindled.  A  period  of  expanding  credit  means  eager- 
ness to  lend  as  well  as  eagerness  to  borrow.  If,  then,  we  would 
understand  the  period  which  now  claims  our  attention,  so  as 
to  draw  from  it  the  true  lessons  it  teaches,  we  must  at  the 
outset  undertake  to  discover  the  source  of  that  confidence 
srranted  without  hesitation  to  the  States. 

In  following  out  the  line  of  study  thus  suggested,  the  first 
fact  of  importance  is  neither  financial  nor  industrial,  but  po- 
litical. The  year  1830,  which  marks  the  rise  of  borrowing 
among  the  States,  witnessed  the  reversal  of  certain  political 
tendencies  which,  up  to  that  time,  had  been  maintained  in 
national  affairs.  Democracy  was  in  the  ascendancy,  and 
many  measures  were  adopted  by  the  dominant  party,  the 
purpose  of  which  was  to  weaken  the  administrative  power 
of  the  central  government.  As  a  subordinate  part  of  this 
policy  the  States  were  imposed  with  new  duties,  and  it  was 
through  their  ready  response  to  the  demands  made  upon 
them  that  they  became  financially  embarrassed. 

This  change  in  the  political  purpose  of  the  American  peo- 
ple may  be  clearly  seen  if  we  trace  the  notion  of  local  govern- 
ment as  it  appears  in  the  development  of  national  affairs. 
Political  parties  in  this  country  arose  out  of  a  controversy 
respecting  the  adoption  of  the  Constitution.  The  question 
in  dispute  pertained  to  the  nature  of  that  instrument.     Was 

*  Quoted  from  a  pamphlet  of  1840,  entitled,  "A  ViDdication  of  Public  Faith 
of  New  York  and  Pennsylvania  in  reply  to  the  Calumnies  of  the  '  Times,' "  p.  24. 


320  LOCAL  DEFICIT  FINANCIERING. 

it  national  or  federal  in  its  character  ?  Would  it  ultimately 
result  in  the  establishment  of  an  empire  or  of  a  republic  ? 
The  story  of  the  manner  in  which  the  national  party  came  to 
assume  the  name  of  "  Federalists  "  is  interesting,  because  it 
shows  what  must  have  been  the  ruling  sentiment  of  the  peo- 
ple in  1Y88  and  1789.  It  was  tacitly  admitted  that  an  anti- 
federal  Constitution  could  not  be  adopted.  At  first,  they 
who  opposed  the  Constitution  called  themselves  Federalists, 
as  showing  the  ground  of  their  opposition  to  the  proposed 
government ;  but  their  opponents  quickly  saw  the  strength 
of  such  a  position  and  the  power  of  such  a  party  cry,  and, 
with  true  strategic  insight,  determined  to  ca23ture  the  name.^ 
The  controversy,  at  least  in  the  State  of  New  York,  centered 
in  the  question  as  to  which  faction  truly  represented  the  fed- 
eral idea.  The  result  is  familiar.  The  "  anti-adoptionists  " 
were  driven  from  their  stronghold.  They  first  assumed  the 
name  of  Federal  Republicans,  and  then  of  Republicans ;  and 
it  is  this  party  which  is  the  historical  progenitor  of  both  Jef- 
fersonian  and  Jacksonian  Democracy. 

The  first  two  administrations  were  guided  by  those  states- 
men who  had  persuaded  the  people  to  accept  the  Constitu- 
tion ;  and  being  controlled  by  the  purpose  of  extending 
the  duties  and  functions  of  the  central  government,  they 
necessarily  lent  their  influence  to  the  consolidation  of  power. 
This  was  so  apparent  that  it  gave  rise  to  grave  apprehen- 
sions among  those  who  were  jealous  of  local  rights,  and  it 
was  by  means  of  this  jealousy  that  the  Republicans  raised 
themselves  to  oflice  in  1801.  There  was,  however,  no  marked 
change  in  the  administrations  that  followed.  Such  was  the 
condition  of  foreign  affairs  that  the  Republicans  were  unable 
to  redeem  their  campaign  pledges  and  restore  to  the  States 
any  of  their  lost  importance. 

It  is  true  that  internal  duties  were  abolished,'  but  on  the 
other  hand  the  purchase  of  Louisiana  showed  the  trend  of 

*  Leake's  "  Life  and  Times  of  General  John  Lamb,"  pp.  305  and  306. 

*  It  is  a  significant  fact  that  Gallatin  refused  to  formally  propose  the  aboli- 
tion of  internal  duties.     This  proposal  came  from  John  Randolph  as  chairman 


STATE  INDEBTEDNESS  BETWEEN   1830  AND   1850.         321 

events  toward  nationaKtj  to  be  stronger  than  the  avowed 
purpose  of  the  party.  Then  came  the  war  of  1812  and  the 
establishment  of  the  American  system  of  protection,  both  of 
which  events  worked  to  the  detriment  of  the  States  and  in- 
creased the  relative  importance  of  the  central  government. 
During  the  years  that  followed  the  second  war,  say  from 
1818  to  1828,  the  manifest  tendency  toward  centralization 
was  the  occasion  of  grave  apprehension,  and  gave  rise  to  two 
quite  distinct  lines  of  opposition.  These  found  expression, 
in  the  metaphysical  doctrines  of  Calhoun  on  the  one  hand, 
and  in  the  practical  measures  of  Jackson's  domestic  policy  on 
the  other.  It  is  with  this  latter  that  we  are  especially  con- 
cerned, for  it  was  in  harmony  with  Jacksonian  ideas  that  the 
States  again  became  the  centers  of  administrative  activity. 

The  policy  of  decentralization  adopted  about  1830  was 
extremely  simple.  The  Federal  government  withdrew  from 
certain  duties  which  it  had  previously  performed,  and  refused 
to  take  upon  itself  new  tasks  which  quite  a  respectable  mi- 
nority of  the  American  people  sought  to  impose  upon  it ; 
and  it  was  in  this  manner  that  the  States,  after  an  uneventful 
existence  of  more  than  forty  years,  again  became  the  centers 
of  important  administrative  measures.  In  our  day  private 
corporations  compete  with  governmental  agencies  for  the 
administration  of  great  affairs,  but  at  that  time  private  en- 
terprise was  not  thought  to  be  adequate  to  meet  the  demands 
of  the  public  for  internal  improvements.  The  States  were 
thus  forced  into  a  prominent  position. 

It  would  lead  us  too  far  from  our  purpose  to  speak  at 
length  of  the  various  parts  of  Jackson's  domestic  policy,  nor 
does  this  seem  to  be  necessary.  It  is  only  important  that  we 
clearly  see  how  the  Federal  government  rolled  certain  duties 
from  off  its  own  shoulders  on  to  those  of  the  States,  and  this 
may  be  the  best  perceived  by  tracing  the  development  of  the 
idea  of  internal  improvements. 

of  the  Committee  of  Ways  and  Means,  after  he  had  received  assurance  from  the 
Secretaries  of  War  and  Navy  that  their  departments  could  be  administered  with 
greater  economy. 


322  LOCAL  DEFICIT  FINANCIERING. 

The  original  incentive  to  the  development  of  inland  com- 
munication was  political  and  not  commercial.  Washington 
clearly  saw  at  an  early  day  that  a  country  of  such  vast  extent 
and  variety  of  territory  as  that  ceded  by  Great  Britain  could 
not  be  held  together  except  by  community  of  interests  be- 
tween the  various  sections,  and  tliat  this  community  of  in- 
terest could  only  spring  from  easy  and  continuous  commercial 
intercourse.  His  own  words  will  show  how  strongly  he  felt 
on  this  point : 

I  need  not  remark  to  you  [wrote  he  to  Governor  Harrison, 
of  Virginia],  that  the  flanks  and  rear  of  the  United  States  are 
possessed  by  other  powers,  and  formidable  ones,  too  ;  and  how 
necessary  it  is  to  apply  the  cement  of  interest  to  bind  all  parts 
of  the  Union  together  by  indissoluble  bonds,  especially  that 
part  of  it,  which  lies  immediately  west  of  us,  with  the  middle 
States.  For  what  ties,  let  me  ask,  have  we  upon  the  people 
(in  the  Mississippi  Valley)  ?  How  entirely  unconnected  with 
them  shall  we  be,  and  what  troubles  may  we  not  apprehend,  if 
the  Spaniards  on  their  right,  and  Great  Britain  on  their  left, 
instead  of  throwing  stumbling  blocks  in  their  way,  as  they 
now  do,  should  hold  out  lures  for  their  trade  and  alliance  ? 
What,  when  they  gain  strength,  which  will  be  sooner  than 
most  people  conceive  (from  the  emigration  of  foreigners,  who 
will  have  no  particular  predilection  for  us,  as  well  as  the  re- 
moval of  our  own  citizens),  will  be  the  consequences  of  their 
having  formed  close  connections  with  either  or  both  of  these 
powers,  in  a  commercial  way  ?  It  needs  not,  in  my  opinion, 
the  gift  of  prophecy  to  foretell.' 

The  Western  States,  he  went  on  to  say  "  hang  on  a  pivot," 
and  to  turn  their  thoughts  eastward  rather  than  southward, 
he  proposed  that  easy  means  of  communication  be  provided 
between  the  two  sides  of  the  Appalachian  Mountains. 

It  is  quite  natural  that  the  conception  of  public  improve- 
ments which  sprang  from  the  idea  of  nationality  should  find 
ready  acceptance  with  men  infused  with  national  sentiments. 
Even  the  plan  which  Gallatin  presented  in  ISOY,'^  according 
to  which  $20,000,000  were  to  be  maintained  as  a  revolving 

'  Sparks's  edition  of  "  Writings  of  Washington,"  vol.  ix,  p.  62. 
*  State  Papers,  "  Miscellaneous  Documents,"  vol.  i,  p.  Y24. 


STATE  INDEBTEDNESS  BETWEEN  1830  AND   1850.         323 

fund  for  building  highways  of  commerce,  was,  to  say  tlie 
least,  far-reaching  in  its  tendencies,  although  it  was  thought 
to  be  in  perfect  harmony  with  the  recognized  rights  of  the 
States.  During  the  years  previous  to  1830,  it  will  be  re- 
membered that  one  of  the  great  questions  of  national  policy 
was  the  building  of  canals  and  wagon- roads.  A  national 
board  of  internal  improvements  was  established ;  national 
surveys  were  carried  on  ;  and,  had  not  certain  questions  that 
imperiled  the  general  safety  forced  themselves  upon  public 
attention,  we  should  now  have  been  able  to  write  the  expe- 
rience of  national  improvements  actually  undertaken.  Ac- 
cording to  Benton,  "  the  candidates  for  the  presidency  spread 
their  sails  upon  the  ocean  of  internal  improvements."  ^  As 
early  as  1822,  when  Monroe  placed  his  veto  upon  the  Cum- 
berland-Road bill,  the  sentiment  favoring  internal  improve- 
ments was  general,  and  became  more  intense  through  the  ad- 
ministration of  John  Quincy  Adams. 

Although  the  right  to  construct  highways  of  commerce 
was  quite  generally  conceded  to  Congress,  there  were  many 
who  denied  the  constitutionality  of  placing  Federal  officials 
over  such  works  when  completed.  Many  who  were  friendly 
to  the  policy  refused  to  support  congressional  action  looking 
toward  its  realization.  This  was  the  burden  of  President 
Monroe's  veto  of  the  Cumberland-Eoad  bill  in  1822. 

It  is  of  the  highest  importance  [he  says]  that  this  question 
be  settled.  (That  is,  the  question  as  to  whether  Congress  had 
the  right  to  manage  roads  running  through  the  States).  If  the 
right  exists,  it  ought  forthwith  to  be  exercised.  If  it  does  not, 
surely  those  who  are  friends  to  the  power  ought  to  unite  to 
recommend  an  amendment  to  obtain  it. 

The  policy  of  national  improvements  broke  down  under 
President  Jackson's  veto  of  the  Maysville-Road  bill.  This 
message  brought  again  into  prominence  the  old  idea  respect- 
ing the  proper  residence  of  public  authority.  The  pro- 
gramme adopted  did  not  permit  the  Federal  government 

'  Benton's  "  Thirty  Tears,"  vol.  i,  p.  22. 


324  LOCAL  DEFICIT  FINANCIERING. 

any  control  over  questions  of  internal  policy ;  it  was  con- 
ceived that  the  States  should  manage  all  such  matters. 

Kow,  to  my  mind,  it  is  of  some  importance  that  this 
relation  between  what  may  be  termed  the  national  and  the 
local  theory  of  internal  improvements  be  clearly  recognized, 
for  then  only  can  one  understand  the  unbounded  enthusiasm 
with  which  the  local  governments  went  into  the  business  of 
supplying  the  country  with  canals  and  roads.^  This  enthu- 
siasm had  grown  up  under  the  fostering  care  of  the  Federal 
power.  Its  purposes  had  been  thwarted  because  Congress  did 
not  possess  the  legal  right  to  manage  roads  within  the  bound- 
aries of  a  State.  But  the  people,  caring  more  for  the  end 
than  the  method  of  its  attainment,  presented  their  demands 
to  the  local  governments.  In  this  manner  it  was  that  the 
legislatures  of  States  assumed  the  duties  abandoned  by  Con- 
gress, having  received,  by  bequest,  as  it  were,  the  duty  to 
fulfill  the  wishes  of  the  people  which  had  for  so  many  years 
been  encouraged  by  the  central  government.' 

The  change  of  policy  about  1830,  here  referred  to,  was 
recognized  by  those  who  had  to  do  with  shaping  public  af- 
fairs. The  Hon.  Charles  Francis  Adams,  writing  in  1840, 
upon  State  debts,  says  : 

1  "  The  strength  as  well  as  the  true  glory  of  the  Confederacy  is  founded  on 
the  prosperity  and  power  of  the  several  independent  sovereignties  of  which  it 
is  composed,  and  the  certainty  with  which  they  can  be  brought  into  successful, 
active  co-operation  through  the  agency  of  the  Federal  government." — Jackson's 
Message  of  1830. 

Speaking  of  the  manner  in  which  the  law  for  the  distribution  of  the  surplus 
revenue  was  interpreted  by  the  States,  Mr  Johnson  says:  "The  States  con- 
formed to  what  they  were  led  to  believe  was  the  new  policy  of  the  Government, 
and,  in  anticipation  of  its  continued  aid,  laid  down  plans  of  railroads  and  canals, 
and  both  or  all  parties  rivaled  each  other  in  projecting  intercommunications,  in 
the  belief  that  they  would  develop  the  resources  and  advance  the  prosperity  of 
their  States." — "Report  on  the  Relief  of  the  States,"  p.  513. 

2  To  avoid  any  possible  misunderstanding,  it  may  be  well  to  say  that  Con- 
gress has  had  to  do  with  internal  improvements  since  1830,  but  not  with  any 
public  works  from  which  revenue  could  be  derived,  where  Federal  and  State  au- 
thority might  come  into  conflict.  Federal  assistance  has  been  rendered  either 
by  direct  payment  of  money  to  the  States,  or  by  what  have  now  come  to  be  known 
as  river  and  harbor  appropriations. 


STATE   INDEBTEDNESS  BET\VEEN   1830   AND   1850.  325 

The  Americans  are  proverbial  for  never  being  discouraged. 
If  they  can  not  carry  a  point  directly,  tbey  will  manage  to  do  it 
by  some  roundabout  way.  They  were  determined  upon  improv- 
ing the  communications  between  the  seaboard  and  the  interior. 
A  very  large  number  of  them  thought  it  best  that  this  work 
should  be  done  under  the  superintendence  of  a  common  head, 
and  they  proposed  a  method  of  action  accordingly.  But  the  ex- 
tent of  it  excited  the  apprehensions  of  a  still  greater  number, 
and  they  refused  to  adopt  it.  According  to  them,  the  business 
could  be  intrusted  with  safety  only  to  the  care  of  the  separate 
States  upon  whom  it  was  in  the  end  devolved.  The  consequence 
has  been  the  outlay  of  quite  as  much  money,  if  not  a  great 
deal  more,  than  would  have  been  expended  on  the  other  plan.' 

It  will  not  be  necessary  for  us  to  trace  the  development 
of  this  policy  of  internal  improvements  in  the  various  local 
centers.  Sufficient  is  it  to  say  that  the  States,  as  a  rule,  en- 
tered upon  the  work  of  supplying  public  highways  with  an 
unbounded  enthusiasm,  and  projected  schemes  absolutely 
absurd  in  their  magnificent  extravagance.  But  since  specific 
illustration  is  worth  many  general  statements,  I  venture  to 
present  the  plan  as  it  was  adopted  by  the  legislature  of  the 
State  of  Michigan. 

Michigan  was  admitted  into  the  Union  in  January,  1837, 
and  it  might  be  imagined,  from  the  proceedings  of  her  early 
legislatures,  that  the  purpose  for  which  she  sought  the 
privileges  of  a  State  was  to  build  canals,  railroads,  and  turn- 
pikes, and  to  improve  rivers  and  harbors.  The  legislature, 
in  its  first  session,  appointed  a  "Board  of  Commissioners 
on  Internal  Improvements,"  and  directed  them  to  take  the 
necessary  measures  for  executing  the  following  public  works : 
They  were  to  survey  three  lines  of  railroad  across  the  State — 
called,  respectively,  the  Southern,  the  Middle,  and  the  North- 
ern routes,  and  one  shorter  road,  called  the  Havre  Branch 
Kailroad.  They  were  also  to  undertake  three  important  ca- 
nals— ^the  Clinton  and  Kalamazoo,  the  Saginaw  or  l^orthem, 
and  a  canal  about  the  St.  Mary's  Eiver.  In  addition  to  this, 
the  Grand,  the  Kalamazoo,  and  the  St.  Joseph  rivers  were  to 


'  "  North  American  Review,"  vol.  li,  p.  321. 
22 


326  LOCAL   DEFICIT  FINANCIERING. 

be  improved.  The  total  extent  of  these  works  entered  upon 
by  the  first  legislature  amounted  to  1,100  miles  of  highway, 
of  which  557  miles  were  to  be  railroads,  231  canals,  and  321 
improvements  of  rivers.  The  population  of  the  newly  ad- 
mitted State  was  at  this  time  175,000,  from  which  it  appears 
that  the  legislature  projected  one  mile  of  improvement  for 
every  150  of  the  inhabitants,  which,  upon  common  averages, 
gives  one  mile  for  every  thirty  votes.  Besides  these  im- 
provements under  the  direct  control  of  the  State,  there  were 
in  existence,  in  1837,  twenty  charters  to  private  companies 
for  the  building  of  railroads.  The  extent  of  lines  proposed 
by  these  companies  was  930  miles,  from  which  it  appears 
that  there  were  over  2,000  miles  of  commercial  highway  pro- 
jected before  the  State  was  a  year  old,  and  this  estimate  does 
not  include  turnpikes.-^  Some  idea  of  the  appropriateness  of 
these  plans  may  be  gained  when  compared  with  the  amount 
of  railroad  facilities  wliich  the  settled  experience  of  the  State 
shows  to  be  adequate  to  present  demands  of  corr^merce.  In 
1881,  with  a  population  of  1,G50,000,  there  were  but  3,306 
miles  of  road-bed,  being  one  mile  for  every  500  inhabitants, 
or  every  100  votes.  Certainly  Governor  Barry  was  correct 
when  in  1842,  referring  to  this  great  scheme  of  internal  im- 
provements, he  said  :  "  The  system,  so  called,  was  altogether 
beyond  our  means,  and,  indeed,  embraced  projects  of  im- 
provements that  were  not  at  the  time  required  by  the  public 
good." 

Such  plans  as  these,  and  Michigan  was  by  no  means  pe- 
culiar in  her  enthusiasm  for  internal  improvements,"  do  not 

'  Cf.  Blois's  "  Gazetteer  of  the  State  of  Michigan,"  1838,  pp.  II-QI. 

^  Much  of  interest  on  this  subject  may  be  found  in  "  The  History  of  the  Sur- 
plus Revenue  of  1837,"  a  scholarly  essay  by  Mr.  Edward  G.  Bourne.  He  quotes 
(p.  126)  "from  one  who  lived  through  the  period"  as  follows:  "In  1836  tlie 
fever  of  internal  improvements  raged  throughout  most  of  the  States  of  the 
Union.  Pennsylvania,  my  native  State,  was  crazy  to  improve  the  whole  country, 
whether  the  wants  of  the  people  required  it  or  not.  Indiana  was  almost  as 
wild ;  and  Illinois,  also,  was  crazed  considerably  by  the  mania."  And  the  author 
adds :  "  The  movement  had  begun  in  Illinois  in  1832,  and  had  rolled  on  with  in- 
creasing momentum  till  1836,  when  the  law  (i.  e.,  the  Improvement  Bill)  was 


STATE   INDEBTEDNESS  BETWEEN   1S30  AND    1S50.         327 

find  adequate  explanation  in  the  withdrawal  of  the  Federal 
government  from  the  direct  prosecution  of  public  works. 
The  States  undertook  to  perform  the  impossible,  while  the 
legacy  of  duty  which  they  received  from  the  central  govern- 
ment was  moderate  and  rational.  The  change  of  policy  in 
1830  serves  only  as  the  background  upon  which  other  facts 
may  be  thrown,  for  there  came  at  this  time  other  forces, 
partly  independent  and  partly  the  outgrowth  of  this  new 
policy  of  Democracy,  with  which  one  must  acquaint  himself 
in  order  to  explain  fully  this  second  period  of  local  bor- 
rowing. 

In  the  first  place,  the  States  received  direct  assistance 
from  the  general  government  in  money  and  lands.  Xot 
only  did  Congress  give  up  all  claims  of  active  control  in 
matters  of  inland  commerce,  but  that  body  donated  also  the 
surplus  revenue  of  the  national  treasury,  and  a  percentage 
upon  the  sales  of  all  lands,  to  form  a  fund  with  which  the 
States  could  carry  out  their  plans  of  public  works.  These 
moneys  formed  by  no  means  an  insignificant  sum.  In 
Michigan,  for  example,  the  experience  of  1836  gave  every 
reason  to  hope  large  things  from  the  fund  established. 
Standing  on  the  verge  of  the  year  1837,  those  who  controlled 
the  policy  of  this  State  saw  coming  into  her  treasury  $280,- 
000  from  surplus  revenue,  and  $175,000  from  her  percentage 
of  land-sales.  There  was  no  precedent  for  such  extensive 
sale  of  lands,  and  it  is  not  surprising  that  this  young  State 
indulged  in  dangerous  optimism,  not  distinguishing  between 
purchases  for  purpose  of  speculation  and  for  purpose  of  set- 
tlement, and  not  recognizing  that  the  immense  dealings  in 
real  estate  were  one  of  the  results  of  the  pernicious  financial 
policy  of  the  central  government.  There  is  no  question  but 
that  the  assistance  of  the  general  government,  coming  at  the 
time  when  it  did,  is  largely  responsible  for  the  carelessness 
with  which  local  obligations  were  incurred. 

passed.  It  was  not  the  fault  of  the  politicians,  but  of  the  people  who  clamored 
for  it ;  the  people  would  not  trust  their  representatives,  but  sent  on  delegates  to 
lobby." 


328 


LOCAL  DEFICIT  FIJTANCIERING. 


But  again,  the  invitation  to  embark  in  great  public  works 
was  especially  alluring  during  tbe  three  years  previous  to 
1838,  on  account  of  the  process  of  inflation  through  which 
the  country  was  passing.  With  the  downfall  of  the  national 
bank,  an  era  of  unsecured  paper  money  ensued.  The  ra- 
pidity with  which  inferior  instruments  of  exchange  grew, 
upon  the  reversal  of  the  national  policy,  may  be  seen  from 
the  following  figures,  giving  the  notes  in  circulation,  and  the 
deposits  and  loans  of  the  banks : 


January,  1830 
"  1835 
«'  1836 
"    1837 


Circulation. 


$61,324,000 
103,269,495 
140,301,038 
149,185,890 


Deposits. 


$55,560,000 

83,081,000 

115,104,000 

127,397,000 


Loans. 


$200,451,000 
365,163,000 
457,506,000 
525,115,000 


This  most  certainly  indicates  a  period  of  inflation,  and  all 
the  results  of  inflation  familiar  to  the  student  of  economy 
followed  in  their  most  intense  form.  Yalues  were  radically 
disturbed ;  fictitious  profits  were  regarded  as  real,  and  the 
apparent  success  of  modest  endeavors  led  men  to  enter  boldly 
upon  great  undertakings  ;  land  speculation  was  especially  ex- 
cessive, for  it  was  believed  that  the  "vast  West"  was  to 
come  immediately  into  the  market.  It  is  not  too  much  to 
say  that  these  were  years  of  business  insanity.  Cool  judg- 
ment had  for  the  time  lost  control,  and  men  acted  upon  an 
impulse  which  they  themselves  could  not  afterward  under- 
stand. The  enthusiasm  of  legislators  was  merely  one  of  the 
manifestations  of  the  general  enthusiasm  of  the  times.  I 
have  collated  with  some  care  the  enterprises  projected  by  the 
legislature  in  one  of  the  Western  States,  and  those  set  on 
foot  by  pi-ivate  parties  in  the  same  State,  and  I  do  not  hesi- 
tate to  say  that,  whether  judged  from  the  standpoint  of  re- 
sults or  of  business  probabilities,  the  State  authorities  showed 
greater  foresight  and  greater  business  conservatism  than  did 
individuals.  The  intimate  relation  between  an  inflated  cur- 
rency and  the  projected  improvements  in  the  State  of  Michi- 
gan is  well  told  by  Governor  Barry  in  his  message  of  1842  : 


STATE   INDEBTEDNESS  BETWEEN    1S30   AND   1850.  329 

The  conception  of  the  plan  on  a  scale  so  magnificent  [said 
the  governor]  is  to  be  attributed  to  the  erroneous  opinion  of 
wealth  produced  by  a  too  redundant  paper  currency.  The  sys- 
tem was  altogether  too  extended  for  our  wants,  and  required 
expenditures  beyond  our  means.  It  was  px'ojected  at  a  time 
when  things  were  too  often  viewed  through  a  distorted  vision. 
Property  had  assumed  fictitious  value  ;  national  as  well  as  in- 
dividual revenues  were  greatly  overestimated,  and  the  minds 
of  men  had  become  inflated  by  imaginary  success  in  the  ac- 
quirement of  wealth.  Individuals  embarked  with  confidence 
in  enterprises  which  they  now  regard  as  extravagant  and  vis-  * 
ionary.  The  spirit  of  the  times,  unfortunately,  became  the 
governing  policy  of  States,  and  Michigan,  with  a  population 
then  less  than  two  hundred  thousand,  inhabiting  a  territory 
new  and  recently  settled,  with  few  immediate  resources  but 
her  credit,  projected  a  system  of  internal  improvements  which 
would  have  been  a  grand  undertaking  for  the  oldest  and  most 
wealthy  States. 

The  third  fact  upon  which  reliance  is  placed  for  explain- 
ing this  period  of  expanding  credit  is  wholly  industrial  in 
character. 

It  is  usually  the  case  that  a  wide-spread  enthusiasm  for 
any  industrial  enterprise  is  imitative  rather  than  original. 
This  is  most  certainly  true  of  the  period  we  are  now  study- 
ing. The  State  of  'New  York  must  be  regarded  as  the  pio- 
neer in  matters  of  public  works,  and  the  financial  and  com- 
mercial success  of  the  Erie  Canal  exerted  no  slight  influence 
in  leading  other  States  to  believe  that  a  like  success  awaited 
every  enterprise.  This  highway  of  commerce  was  finished 
in  1825.  It  immediately  became  a  source  of  revenue,  and 
proved  that  the  statesmen  who  urged  it  upon  the  people  were 
wise  counselors.  Nor  was  it  alone  the  final  success  of  the  en- 
terprise that  worked  upon  the  imagination  of  other  localities, 
but  the  accuracy  of  calculations  respecting  it  also  induced 
men  to  place  great  confidence  in  enterprises  similarly  man- 
aged. In  1826  it  was  estimated  that  the  debt  incurred  in 
building  the  Erie  Canal  could  be  expunged  in  the  course  of 
ten  years'  operation.  The  figures  upon  which  the  conclusion 
rested  are  the  following.  On  the  side  of  receipts,  the  an- 
nual income  was : 


330  LOCAL  DEnCIT  FINANCIERING. 

From  tolls ITOO.OOO 

From  auction  sales 250,000 

From  salt  duties 170,000 

Chargeable  to  the  revenue  which  was  applied  to  canal  man- 
agement, there  was : 

Interest  on  the  debt $410,000 

Expense  of  repairs 100,000 

leaving  a  yearly  appropriation  of  $610,000  for  the  payment 
'  of  the  debt.  Upon  the  basis  of  these  figures,  the  debt  could 
be  discharged  in  ten  years,  and  the  result  of  the  management 
of  the  enterprise  showed  the  calculation  to  be  correct  within 
six  months.  It  was,  perhaps,  the  successful  management  of 
this  New  York  enterprise,  more  than  any  other  one  tiling, 
that  occasioned  the  outburst  of  enthusiasm  in  favor  of  local 
improvements. 

But  there  is  another  fact  worthy  our  attention  in  connec- 
tion with  the  Erie  experiment.  Previous  to  the  completion 
of  this  highway  of  commerce,  the  city  of  New  York,  like  the 
cities  of  Boston,  Philadelphia,  and  Baltimore,  had  been  a 
local  village,  draining  the  country  naturally  dependent  upon 
it ;  but,  with  the  completion  of  the  canal,  it  at  once  became 
a  port  of  importance  to  the  entire  country  west  of  the  Alle- 
ghany Mountains  and  north  of  the  Ohio  River.  The  local 
interests  of  Philadelphia  and  Baltimore  were  placed  in  jeop- 
ardy, and  these  cities  at  once  undertook  protective  measures 
by  pushing  vigorously  their  own  schemes  for  inland  com- 
merce. Then  began  that  struggle  between  the  seaboard  cities 
for  commercial  supremacy  over  the  West,  which  has  become 
more  and  more  intense  even  to  the  present  time.  The  point 
which  I  wish  to  make  is  this :  About  1830,  men  in  the  East 
were  for  the  first  time  coming  to  realize  the  great  possibili- 
ties of  the  West,  and  the  rivalry  between  the  various  sections 
of  the  East  to  secure  to  themselves  the  benefits  of  the  trade 
which  was  sure  to  spring  up,  induced  men  in  these  sections 
to  lend  freely  to  such  enterprises  as  would  be  of  especial  ad- 
vantage to  themselves.  It  was  under  such  encom*agement, 
and  because  the  idea  of  corporate  control  had  not  yet  been 


STATE  IXDEBTEDNESS  BETWEEN"   1830  AND   1S50.         331 

sufficiently  developed,  tliat  the  States  were  led  to  freely 
mortgage  their  sovereign  credit  for  pushing  public  works. 

I  have  thus  endeavored  to  suggest  the  active  forces  which 
gave  character  to  the  years  of  local  control  between  1830  and 
1810,  and  it  is  believed  that,  taken  in  their  relation  to  each 
other,  they  furnish  an  adequate  explanation  of  the  excessive 
employment  by  the  States  of  their  sovereign  credit.  The 
States  borrowed  money  to  build  public  highways.  That 
public  highways  should  be  built  was  one  of  the  imperative 
demands  of  the  times.  That  the  States  should  undertake 
this  work  rather  than  the  central  government  or  corpora- 
tions, was  the  result  of  this  historical  accident — that  the  call 
for  inland  improvements  came  just  when,  in  the  develop- 
ment of  political  ideas,  there  had  been  a  reaction  against  the 
policy  of  federal  administrative  control,  and  before  the  doc- 
trine of  laissez-faire  had  in  this  coantry  produced  any  results 
except  in  matters  of  foreign  commerce.  The  general  confi- 
dence in  the  States  which  led  men  to  place  money  freely  at 
their  disposal,  was  in  part  merely  an  expression  of  the  gen- 
eral confidence  of  the  times ;  in  part  an  indirect  consequence 
of  the  easy  payment  by  the  Federal  government  of  its  debt ; 
and  in  part  because  men  saw  in  the  public  improvements 
which  the  States  were  undertaking  an  additional  advantage 
beyond  that  of  a  mere  investment  of  so  much  capital.  All 
these  forces  taken  together  made  up  the  atmosphere  of  the 
times,  which,  to  say  the  least,  proved  very  invigorating  to 
those  who  breathed  it. 

We  need  not  arrest  our  study  at  this  point  to  speak  of 
the  failure  of  these  schemes  of  internal  improvement.  In- 
debtedness to  the  amount  of  $200,000,000,  unsecured  by  any 
property  adequate  to  the  support  of  such  a  burden,  is  suffi- 
cient evidence  of  failure.  Had  these  enterprises  been  set 
on  foot  by  private  corporations,  they  would  have  passed  into 
the  hands  of  a  receiver  for  the  benefit  of  creditors,  but  since 
they  had  been  projected  by  tlie  States  nothing  remained  but 
to  throw  upon  taxes  the  deficits  of  the  business.  It  was  this 
fact  which  brought  the  failure  of  the  policy  home  to  the 


332  LOCAL  DEFICIT  FINANCIERING. 

people  with  great  force.  In  Mieliigaii,  for  example,  the  rate 
of  taxation  for  county  and  State  purposes  Avas  but  seventy 
cents  per  capita,  while  the  interest  arising  from  the  public 
improvement  debt  would  have  imposed  upon  the  people  a 
tax  of  one  dollar  and  tliirty-five  cents  per  capita  had  it  been 
paid.^ 

It  was  natural  that  the  States  should,  under  such  circum- 
stances, and  with  the  precedent  of  Eevolutionary  finances 
before  them,  appeal  to  the  Federal  government  for  relief. 
Petitions  to  this  end  came  from  Virginia,  Pennsylvania, 
Maryland,  and  Ohio ;  and  we  are  led  to  believe  from  the 
statements  of  those  interested  in  the  scheme,  that  other  sec- 
tions would  gladly  have  thrown  the  burden  of  their  debts 
upon  the  shoulders  of  Congress.  The  committee  to  which 
these  petitions  were  referred  proposed  that  $200,000,000  of 
Federal  stock  should  be  exchanged  for  State  securities.  It  was 
claimed  that  the  legal  right  of  the  Federal  government  to 
do  this  had  been  settled  by  the  assumption  act  of  1790.  The 
thought  that  the  debts  incurred  during  the  Revolutionary 
War  were  in  reality  Federal  debts,  and  for  that  reason 
should  have  been  assumed  by  the  Federal  government  (i.  e., 
the  theory  of  the  Federalists  in  1790),  was  not  for  a  moment 
admitted ;  and  the  author  of  the  report  of  1842  favoring  a 
second  assumption  devoted  some  considerable  time  in  making 
it  clear  to  his  constituents  that  there  was  in  reality  no  differ- 
ence in  the  two  cases.  After  a  somewhat  extended  review  of 
the  early  debates,  he  says : 

These  facts  and  this  history  clearly  prove  that  the  assump- 
tion was  not  a  matter  of  constitutional  obligation,  but  of  mere 
legislative  discretion,  wisely  and  legally  exercised,  no  doubt, 
under  the  general  and  discretionary  powers  given  to  Congress 

'  It  would  be  exceedingly  difficult  to  give  a  correct  and  complete  account  of 
the  subsequent  management  of  the  debts  resting  upon  the  States  in  1 842.  It 
was  during  this  period  that  the  word  "  repudiation  "  came  into  the  vocabulary  of 
American  finance.  Should  any  of  my  readers  be  interested  in  this  subject  they 
are  referred  to  a  comprehensive  article  by  Mr.  Robert  P.  Porter,  on  "  State  Debts 
and  Repudiation,"  in  the  November  number  of  the  "  International  Review  " 
for  1880. 


STATE  INDEBTEDNESS  BETWEEN   1830  AND   1850.         333 

nnder  the  Constitution.  The  Constitution  is  the  same  now 
as  then  ;  Congress  is  the  same  now  as  then  ;  and  it  can  exer- 
cise as  wise,  as  enlarged,  and  as  liberal  a  discretion  now  as 
then." 

But  although  tlie  assumption  of  State  debts  in  1842  was 
not  regarded  as  "  a  matter  of  constitutional  obligation,"  it  was 
urged  as  a  right  which  the  States  could  demand,  in  view  of 
the  cession  of  lands  which  they  had  made  to  the  central  gov- 
ernment. It  was  argued  that  "  the  States  have  a  controlling 
reason  to  demand  the  measure,  in  the  fact  that  the  public 
lands  were  never  intended,  when  the  Constitution  was 
formed,  to  he  a  source  of  national  revenue  for  the  support  of 
the  General  government.  The  States  gave  to  the  govern- 
ment other  and  abundant  means  of  raising  revenue  for  all  its 
ordinary  and  extraordinary  expenditures.  The  States  surren- 
dered to  the  General  government  the  public  lands  for  their 
specific  benefit.  They  made  the  General  government  the 
agent  or  trustee  to  dispose  of  public  lands,  and  to  distribute 
among  all  the  States  the  product  of  this  trust,  upon  an  equi- 
table and  just  basis. 

"  When  the  General  government  assumed  the  debts  of  the 
State  in  1790,  tlie  proceeds  of  the  sales  of  the  public  lands 
were  pledged  '  until '  the  liquidation  of  that  debt."  Then 
follows  an  estimate  of  the  income  derived  by  the  Federal 
government  from  public  lands,  which  had  been  appropriated 
to  national  purposes,  after  which  the  argument  continued : 
"  Then  the  States  have  a  right  to  demand  a  re-imburse- 
ment,  in  this  period  of  their  utmost  need,  of  this  sum  used 
by  the  government  for  its  own  national  purposes."  * 

But  it  was  not  with  the  intention  of  discussing  the  claim 
here  set  up  respecting  the  interpretation  of  the  old  land-ces- 
sions that  this  phase  of  the  question  is  brought  to  our  atten- 
tion. It  makes  little  difference  how  that  controversy  is  de- 
cided. The  important  point  for  us  to  notice  is,  that  the 
plan  for  assuming  the  State  debts  in  1842  finds  its  historical 

» "Report  on  the  Relief  of  the  States,"  p.  486.  *  Ibid.,  p.  516. 


334:  LOCAL  DEFICIT  FINANCIERING. 

antecedent  in  the  various  distribution  schemes  then  familiar 
to  the  members  of  Congress.  As  earlj  as  1826,  Mr.  Mahlon 
Dickerson,  afterward  a  member  of  President  Jackson's  Cabi- 
net, proposed  to  divide  $10,000,000  of  the  general  revenues 
annually  among  the  States.  The  distribution  of  surplus 
revenue  in  1836,  as  also  the  tariff  compromise  and  the  views 
of  States  rights  which  made  it  a  necessity,  are  well  known 
to  every  student  of  American  history.  But  the  idea  of  dis- 
tribution once  established,  the  payment  of  surplus  revenue  to 
the  local  governments  was  not  regarded  as  adequate  assist- 
ance, and  there  were  many  proposals  that  the  proceeds  of  the 
public  lands  should  be  given  to  the  States  to  help  on  their 
schemes  of  internal  improvements.  It  was  in  connection 
with  one  of  these  proposals,  and  because  of  an  amendment 
which  was  thought  to  kill  the  spirit  of  the  bill,  that  the  plan 
for  assuming  the  debts  of  the  States  took  its  rise.  The  facts 
in  the  case  are  as  follows :  In  1842,  Mr.  Clay  reported  a  bill 
in  the  Senate  to  divide  the  proceeds  of  the  sale  of  public 
lands  for  five  years  between  the  States.  The  chairman  of 
the  Committee  on  Public  Lands  in  the  House  was  William 
Cost  Johnson,  of  Maryland.  Mr.  Clay's  bill  came  before 
this  committee,  and  after  several  amendments,  one  of  which 
made  the  distribution  perpetual  except  in  time  of  war,  was 
passed  by  the  House.  But  in  the  Senate  an  amendment  was 
inserted  to  the  effect  that  the  distribution  should  be  inopera- 
tive if,  at  any  time,  Congress  should  levy  duties  above  20 
per  cent. 

No  one  [says  Mr.  Johnson]  opposed  more  earnestly  than 
myself  the  introduction  of  such  a  principle,  regarding  distri- 
bution to  be  the  right  of  the  States  by  the  act  of  cession, 
without  regard  to  the  rate  of  duties  or  the  condition  of  the 
national  revenue. 

It  was  then  that  he  determined  to  bring  the  matter  of 
assumption  squarely  before  Congress. 

Apprehending  [he  says],  in  the  conflict  of  contending  inter- 
ests, to  say  nothing  of  rival  ambition,  that  the  States  would 
lose  the  benefit  of  distribution,  I  gave  notice  at  an  early  period 


STATE  INDEBTEDNESS  BETWEEN   1830  AND    1850.         335 

of  last  session  that,  at  the  earliest  possible  moment  after  the 
defeat  of  distribution,  I  would  introduce  a  bill,  upon  the  prin- 
ciple and  basis  of  the  law  of  1790,  for  the  assumption  of  the 
debts  of  the  States  by  the  General  government.^ 

It  seemed  to  me  necessary  to  show  the  historical  setting 
of  the  assumption  scheme  of  184:2,  in  order  to  bring  clearly 
into  view  the  relations  existing  between  the  States  and  the 
Federal  government.  The  years  immediately  following 
witnessed  so  violent  a  change  in  public  sentiment,  that  they 
may  be  properly  regarded  as  marking  an  epoch  in  the  consti- 
tutional development  of  the  States.  But  before  speaking  of 
permanent  results,  it  will  be  interesting  to  notice  the  details 
of  this  scheme  of  assumption,  and  to  consider  some  of  the 
arguments  urged  by  those  who  favored  it. 

"Whatever  may  be  said  of  the  policy  of  assuming  local 
obligations,  the  plan  proposed  by  the  committee  which  had 
the  matter  in  charge  was  both  inadequate  and  expensive. 
This  plan  contemplated  the  issue  of  $200,000,000  of  United 
States  stock,  which  should  be  distributed  between  the  States 
in  the  following  manner :  For  each  senator  there  should  be 
allowed  $1,000,000  of  this  stock,  the  residue  being  divided 
among  the  States  on  the  basis  of  Federal  population ;  or,  to 
be  more  exact,  each  representative  should  bring  to  his  State 
the  sum  of  $651,982.38.  The  Territories  and  the  District  of 
Columbia  were  to  receive  stock  equal  to  that  allowed  one 
representative.  It  may  be  remembered  that  the  settlement 
of  inter-State  accounts  after  the  Revolutionary  War,  through 
the  agency  of  assumption,  was  rendered  impossible  by  the 
constitutional  rule  that  all  burdens  imposed  or  beneiits 
granted  by  the  central  government  should  be  apportioned  on 
the  basis  of  Federal  population.  The  same  difficulty  is  here 
encountered.  Nine  States  in  the  Union  were  wholly  free 
from  debt,  and,  should  Federal  stock  be  issued  to  the  delin- 
quent States  and  not  to  these,  it  would  result  that  those 
States  which  had  been  conservative  in  the  management  of 
their  finances  would  be  imposed  with  taxes  for  the  discharge 

»  "  Report  on  the  Relief  of  the  States,"  p.  469. 


336  LOCAL  DEFICIT  FINANCIERING. 

of  their  neighbors'  debts.  To  obviate  this  manifest  injustice, 
it  was  provided  that  the  States  not  indebted  should  have  their 
quota  of  bonds  credited  to  them  on  the  books  of  the  Treas- 
ury, and  should  be  permitted  to  draw  each  year  the  interest 
accruing  ujDon  the  amount  thus  declared  to  be  due. 

But  upon  such  a  plan  as  this,  to  what  extent  would  the 
indebted  States  be  reheved  by  an  issue  of  $200,000,000  of 
stock  ?  The  answer  to  this  question  is  presented  in  the  fol- 
lowing figures :  ^ 

Amount  of  State  debts  ia  1842 $207,894,613.35  ♦ 

Amount  of  Federal  stock  to  be  issued 200,000,000.00 

Amount  of  State  debts  paid  by  such  issue 128,103,917.55 

Balance  yet  due  from  States 79,790,695.80 

Balance  to  the  credit  of  States 71,896,082.55 

It  certainly  seems  that  any  plan  which  would  leave  $Y9,Y90,- 
000  of  debt  yet  resting  on  the  States,  out  of  a  total  of  but 
$207,894,000,  can  hardly  be  called  an  adequate  measure  of 
relief.  But,  on  the  other  hand,  when  we  notice  the  amount 
of  Federal  stock  that  must  have  been  issued  to  grant  ade- 
quate relief  to  the  creditors  of  the  local  governments,  the 
absurdity  of  assumption  makes  itself  at  once  apparent.  The 
only  political  theory  with  which  it  is  in  harmony  is  that  the 
Federal  government  performs  its  proper  function  when 
acting  as  a  financial  collecting  agent  of  States.  If,  however, 
the  original  purpose  of  the  framers  of  the  ConstitutJQn  is  to 
be  maintained,  which  considers  the  sovereignty  of  the  vari- 
ous grades  of  government  as  functional  rather  than  terri- 
torial, the  line  which  distinguished  the  finances  of  the  Fed- 
eral and  the  local  governments  must  never  be  effaced.  It 
was  illogical  for  men  who  believed  in  maintaining  the  po- 
litical integrity  of  the  States  to  admit  of  any  form  of  direct 
assistance  from  the  central  treasury.  And  in  addition  to  this, 
it  may  be  said  that  the  issue  of  bonds  to  States  that  do  not 

'  For  detailed  account,  see  the  table  in  Johnson's  "Report,"  pp.  120,  121. 
It  will  be  observed  that  the  total  indebtedness  here  given  is  greater  than  that 
given  on  page  301 ;  this  amount  includes  certain  "  nominal  debts  "  and  "  de- 
nied obligations." 


STATE  INDEBTEDNESS  BETWEEN  1830  AND   1850.         337 

need  the  money  accruing  therefrom,  would  be  to  invite  in 
its  most  aggravated  form  the  evils  of  surplus  financiering. 

Still,  there  seem  to  have  been  some  plausible  reasons  for 
the  measure  (as  there  undoubtedly  were  in  favor  of  the  first 
assumption),  the  most  important  being  that  the  failure  of  the 
States  to  pay  their  debts  would  affect  injuriously  the  credit 
of  the  Federal  government. 

I  saw  [says  the  author  of  the  measure],  or  thought  I  saw, 
that  the  question  would  be,  sooner  or  later,  relief  or  repudia- 
tion. [And  again  :]  Repudiation  is  avowed  by  but  few  at  this 
time  ;  but  neglect  to  pay  interest  is  the  first  silent  step  toward 
it.  It  now  exists  in  confused  contemplation  in  the  minds  of 
many,  yet  the  moral  sense  of  shame  restrains  the  open  avowal.* 

And  in  the  report  of  the  special  committee  the  complaint 
is  made,  that  the  distrust  caused  by  the  remissness  of  the 
States  had  attached  to  the  General  government. 

While  nations  without  a  tithe  of  our  resources,  and  with 
large  public  debts,  have  been  able  to  effect  loans  at  3  per  cent 
per  annum,  the  agent  of  this  government  had  to  return  from 
the  same  market,  where  capital  is  seeking  investment  at  2  and 
3  per  cent,  without  receiving  a  single  offer  for  any  portion  of 
a  loan  to  our  government  at  6  per  cent.^ 

There  is  no  doubt  as  to  the  fact  here  stated.  For  a  time 
the  Federal  government  was  put  to  some  slight  inconven- 
ience, because  the  country  from  Maine  to  Florida  was  re- 
garded "  as  one  vast  swindling  shop  "  by  our  neighbors  across 
the  sea.  But  this  was  because  the  lines  between  State  and 
Federal  governments  were  not  clearly  defined,  and  because 
certain  creditors  of  delinquent  States  in  London  hoped  to 
force  the  assumption  of  local  debts  upon  the  central  govern- 
ment by  refusing  to  grant  it  financial  standing.^    The  em- 

»  "  Report  on  the  Relief  of  the  States,"  p.  519.  ^  Ibid.,  p.  5. 

^  It  is  upon  the  authority  of  the  late  Mr.  Raphael  Bayley,  whose  "  History  of 
National  Loans  "  forma  such  a  valuable  part  of  the  late  Census  Report,  that  the 
following  fact  is  given.  The  agent  of  the  Federal  government,  upon  presenting 
in  England  proposals  of  the  Secretary  of  the  Treasury  for  a  loan,  was  met 
with  the  following  reply  from  the  house  of  Baring  Brothers :  "  That,  if  the  Fed- 


333  LOCAL  DEFICIT  FINANCIERING. 

barrassment,  however,  was  of  slight  duration.  The  money 
which  was  desired  was  furnished  by  our  own  citizens,  and 
within  two  years  the  stock  thus  created  had  risen  to  14 
per  cent  premium. 

The  proposal  for  assumption  in  1S42  appears  in  its  most 
favorable  light  when  regarded  as  a  measure  for  refunding 
local  obligations.  The  rate  of  interest  was,  on  the  average, 
6  per  cent.  But  could  this  rate  be  reduced  to  3  per 
cent,  a  saving  would  be  thereby  effected  of  $6,000,000; 
which,  devoted  to  the  establishment  of  a  sinking-fund,  w^uld 
expunge  the  entire  debt  in  eighteen  years.  These  figures 
are  a  little  fanciful,  but  they  well  illustrate  the  principle 
underlying  the  argument.  There  is  no  question  but  that  the 
credit  of  the  Federal  government  was  better  than  that  of 
the  States,  and,  assuming  the  debts  would  be  wholly  paid, 
the  country  would  have  experienced  a  lightening  of  its  bur- 
dens had  the  debts  been  guaranteed  by  Congress.  The  other 
arguments  in  favor  of  the  measure  may  be  passed  without 

eral  government  would  assume  the  State  debts,  the  firm  would  guarantee  all  the 
money  it  might  desire  at  3  per  cent ;  but  that  if  the  States  were  left  to  con- 
trol their  own  finances,  the  Federal  government  could  secure  no  money  in  Lon- 
don at  any  price." 

Further  evidence  of  the  fact  is  found  in  "  A  Letter  to  a  Lady  in  France,  in 
Answer  to  Enquiries  Concerning  the  Late  Imputations  of  Dishonor  upon  the 
United  States,"  by  Thomas  G.  Gary,  printed  in  1844.  Speaking  of  this  endeavor 
to  secure  subscriptions  to  a  Federal  loan,  he  says  (p.  20) :  "  The  capitahsts  of 
Europe  declined  lending  this ;  partly,  perhaps,  from  real  doubts  of  the  solidity 
of  our  institutions,  and  partly,  probably,  with  a  view  to  make  us  all  feci  dis- 
credit so  sensibly,  that  our  national  government  should  be  induced  to  assume, 
fts  it  has  no  right  to  do,  the  debts  of  the  delinqueut  States.'' 

There  is  considerable  history,  in  connection  with  this  question  of  assump- 
tion in  1842,  that  has  yet  to  be  written.  It  is  always  the  case  when  accounts 
become  involved  that  those  who  express  an  interest  in  clearing  them  up  are 
charged  with  dishonest  motives.  Even  Mr.  Webster  felt  obliged  to  deny  the 
imputation  that  he  was  retained  by  the  Barings  of  London  to  use  his  influence 
in  favor  of  the  scheme  of  assumption. 

But  Mr.  Johnson,  who  is  the  recognized  sponsor  for  the  plan,  declares,  with 
his  characteristic  modesty,  that  "  the  proposition  originated  with  himself 
alone.  ...  I  neither  borrowed  the  idea  from  any  one,  nor  counseled  with 
any  one,  nor  was  aided  either  directly  or  indirectly  by  any  human  being  what- 
ever."—" Report  on  the  Relief  of  the  States,"  p.  621. 


STATE  INDEBTEDNESS  BETWEEN   1830  AND   1850.         339 

mention.  Thej  are  neither  very  logical  nor  pertinent, 
though  the  presentation  of  them  requires  a  report  of  nearly 
six  hundred  pages.  It  is  sufficient  to  say  that  Congress  did 
not  look  with  favor  upon  the  scheme,  and  the  matter  was 
dropped.  How  far  the  agitation  in  favor  of  assumption 
may  have  influenced  the  States  in  deferring  the  levy  of  taxes 
for  the  support  of  their  credit  we  have  no  means  of  deter- 
mining with  any  degree  of  certainty  ;  but  it  is  not  probable 
that  the  history  of  local  financiering  was  much  changed  by 
the  labors  of  Mr.  Johnson's  committee. 

This  chapter  of  financial  history  is  not  of  so  much  im- 
portance in  itself  considered  as  in  its  influence  upon  the  fur- 
ther development  of  our  political  and  industrial  constitutions. 
The  financial  disasters  which  we  have  described  were  fol- 
lowed by  a  reaction  in  public  sentiment  against  State  man- 
agement of  internal  commerce,  and,  as  is  usually  the  case, 
this  reaction  showed  strength  proportional  to  the  strength 
of  the  policy  against  which  it  was  aroused.  As  the  people 
had  driven  their  representatives  to  enter  uiDon  internal  im- 
provements without  caution,  so,  when  taxes  began  to  press, 
they  censured  them  without  justice,  and  disowned  the  poli- 
cy. This  reaction  was  complete  and  irresistible,  and  one 
may  discover  now,  in  the  structure  of  industrial  society,  two 
facts  that  are  traceable  to  it. 

In  the  first  place,  the  withdrawal  of  the  States  from  the 
domain  of  internal  improvements  marks  the  rise  of  corpo- 
rate power  in  the  United  States.  As  in  1830  the  Federal 
government  abandoned  the  thought  of  direct  control  over 
remunerative  public  works,  giving  up  the  field  in  favor  of 
local  governments,  so,  during  the  years  from  1842  to  1846,  a 
revulsion  of  sentiment  turned  all  this  business  over  to  indi- 
viduals. So  far  from  realizing  the  programme  of  Jackson- 
ian  democracy,  according  to  which  the  States  were  to  recover 
their  administrative  importance,  this  experiment  resulted  in 
the  establishment  of  a  new  power,  unknown  to  the  founders 
of  our  government,  yet  intrusted  with  truly  sovereign  func- 
tions.    The  rise  of  the  corporation  marks  an  epoch  in  the 


34:0  LOCAL  DEFICIT  FINANCIERING. 

history  of  inland  commerce.  The  material  advancement  of 
the  United  States  since  1850  no  one  can  nor  does  one  care 
to  deny ;  yet  the  industrial,  the  political,  and  the  social  influ- 
ences that  have  been  introduced  into  national  life  by  the  un- 
precedented grov7th  of  corporate  power,  are  the  occasion  for 
grave  apprehension.  Cities  have  been  unnecessarily  crowded ; 
real  estate  values  have  been  arbitrarily  distributed ;  a  social 
dependence  is  being  introduced  not  surpassed  in  its  evil  tend- 
encies by  any  previous  form  of  servitude  ;  politics  are  being 
run  in  the  interests  of  profit  to  those  already  gorged  with 
profit ;  while,  from  the  political  point  of  view,  it  is  to  the  en- 
croachment of  private  corporations,  as  much  as  to  the  cen- 
tralizing tendencies  of  the  Federal  government,  that  the 
present  impotency  of  the  State  governments  is  due.  It  thus 
appears  that  the  financial  crisis  of  the  State  treasuries  was  a 
turning-point  in  the  development  of  national  life. 

In  the  second  place,  the  failure  of  this  policy  of  internal 
improvements  led  to  radical  changes  in  the  constitutions  of 
the  various  States.  It  requires  but  slight  acquaintance  with 
the  detailed  control  of  great  enterprises  to  lead  one  to  per- 
ceive that  any  stricture  upon  the  power  to  borrow  money 
curtails  the  ability  of  a  government  to  manage  canals  or  rail- 
roads. Previous  to  1830,  no  State  in  the  Union  was  in  any 
way  restricted  in  the  employment  of  its  credit ;  at  the  pres- 
ent time,  however,  there  are  but  three  States  whose  consti- 
tutions do  not  limit  in  some  way  the  power  to  borrow 
money .^  Michigan  and  Arkansas,  admitted  into  the  Union 
at  the  time  that  the  fever  for  public  improvements  was  at 
its  height,  incorporated  into  their  constitutions  a  clause 
making  it  the  duty  of  the  legislatures  to  establish  a  system 
of  public  improvements.  The  sentiment  that  spoke  in  these 
cases  through  the  general  conventions  of  the  people  found 
expression  in  other  States  in  current  elections.  But  with 
the  reaction  of  opinion,  all  this  was  changed.     In  1848,  and 

*  This  subject  again  claims  our  attention  in  the  last  chapter  of  this  treatise, 
where  the  details  of  the  laws  are  portrayed. 


STATE   INDEBTEDNESS   BETWEEN   1830  AND    1850.         34I 

the  years  following,  the  new  constitutions,  as  well  as  amend- 
ments to  the  old  ones,  quite  generally  prohibited  the  States 
from  having  anything  to  do  wdth  remunerative  works 
requiring  capital.  This  finds  direct  expression  in  the  or- 
ganic laws  of  Wisconsin,  Minnesota,  and  Michigan,  while 
many  constitutions,  by  curtailing  the  power  to  contract  a 
debt,  render  it  impossible  for  the  States  to  incur  those  busi- 
ness obligations  necessary  for  the  economical  prosecution  of 
great  works.  It  became  the  general  cry  that  public  works 
should  be  carried  on  by  private  enterprise,  and  to  secure  this, 
the  States  were  prohibited  from  interference.  The  direct 
connection  between  these  two  theories  of  control  is  the  best 
illustrated  in  the  modification  of  the  constitution  of  Illinois. 
Illinois  had  undertaken  both  State  banking  and  State  im- 
provements, and  had  failed  in  both.  In  her  new  constitution 
of  1848,  she  retained  the  clause  that  internal  improvements 
should  be  encouraged,  but  with  this  significant  modification 
— this  was  to  be  done  "  by  passing  liberal  laws  of  incorpora- 
tion for  that  purpose." 

It  is  my  intention  to  consider  at  length  this  policy  of  re- 
stricting the  functions  of  local  governments,  when  all  the 
facts  bearing  on  the  case  shaU  have  been  presented ;  for  the 
present  it  is  only  necessary  to  hold  clearly  in  mind  the  three 
steps  by  which  our  industrial  constitution  has  attained  its  ex- 
isting form,  and  a  statement  of  these  stages  of  growth  will 
serve  as  a  summary  of  the  foregoing  analysis. 

The  people  of  the  United  States  of  America  began  their 
national  life  as  an  aggregation  of  localities  bound  together  by 
the  tie  of  political  interest.  They  had  at  first  no  trade  and  no 
internal  commerce,  and  for  this  reason  the  industrial  idea  did 
not  appear  of  much  importance.  The  purpose  of  establishing  a 
political  sovereignty  claimed  the  attention  of  early  statesmen, 
and  industrial  interests  were  made  in  all  respects  subordinate 
to  political  considerations.  In  this  relation  of  the  two  inter- 
ests to  each  other — the  political  and  the  industrial — do  we 
find  the  explanation  of  the  fact  that,  while  the  States  showed 

great  jealousy  of  the  Federal  government  in  the  extension 
23 


342  LOCAL  DEFICIT  FINANCIERING. 

of  its  political  powers,  they  were  yet  quite  willing  to  concede 
to  it  the  duty  of  developing  inland  commerce.  In  addition 
to  this  general  suggestion,  there  are  two  significant  facts 
which  the  period  of  history  we  are  now  considering  portrays. 
First,  the  prevailing  sentiment  of  the  time  did  not  deny  to 
government  agencies  the  right  of  assuming  control  over  in- 
dustrial enterprises.  Second,  the  policy  of  internal  improve- 
ments by  the  Federal  government  broke  down  under  the 
stress  of  legal  criticism,  and  not  because  the  purpose  of  Con- 
gress failed  to  meet  the  approval  of  the  public.  The  doc- 
trine of  laissez-faire,  so  far  as  matters  of  internal  orgai5iza- 
tion  were  concerned,  had  not  then  many  converts  in  this 
country. 

The  second  step  in  the  development  of  the  industrial  con- 
stitution was  taken  when  the  Federal  government  gave  up 
to  the  States  the  duty  of  providing  for  internal  commerce 
and  for  the  issue  of  bank  notes.  The  transfer  of  these  duties 
was  typical  of  the  sentiment  which  then  prevailed.  As  we 
have  seen,  this  experiment  by  the  States  proved  a  failure, 
and,  because  of  the  financial  disasters  which  followed,  the 
entire  business  of  internal  improvements  was  passed  over  to 
the  control  of  corporations.  It  is  this  transition  which  marks 
the  beginning  to  the  third  period  of  industrial  development 
in  the  United  States,  and  it  is  at  this  point  in  the  history  of 
administration  that  the  financial  operations  of  the  common- 
wealths cease  to  be  of  much  importance,  while  that  of  the 
cities  and  minor  civil  divisions  is  forced  into  prominence. 
My  own  opinion  is,  that  it  was  a  mistake  for  the  States  to 
abdicate  certain  sovereign  functions  in  favor  of  private  cor- 
porations, for  the  evils  thus  incurred  have  proved  greater  than 
the  evils  escaped ;  but  the  soundness  of  such  a  conclusion 
can  only  be  determined  after  a  study  of  the  financial  devel- 
opment of  the  minor  civil  divisions. 


CHAPTER  III. 

MUNICIPAL   INDEBTEDNESS. 

"We  come  now,  in  the  course  of  our  study,  to  consider  the 
debts  of  cities  and  minor  civil  divisions.  The  general  facts 
pertaining  to  this  class  of  obligations  in  the  United  States 
have  been  already  presented,  and  the  development  of  local 
indebtedness  to  the  time  when  municipal  governments  came 
to  the  front  has  been  traced.  It  can  not  be  said  that  any 
serious  danger  attended  the  use  of  local  credit  previous  to 
1865.  In  1840,  the  debts  of  cities  amounted  to  little  more 
than  $25,000,000,  and  there  appears  to  have  been  no  flagrant 
abuse  of  authority  on  the  part  of  those  controlling  municipal 
affairs.  It  is  quite  possible  the  disasters  attending  the  en- 
deavor of  the  States  to  carry  on  public  works  may  have  kept 
the  inferior  governments  to  a  conservative  fiscal  policy.  So 
late  as  the  year  1860,  the  bonded  indebtedness  of  the  cities 
containing  a  population  of  7,500  and  upward  was  but  $51,- 
000,000,  and  the  total  of  local  obligations  resting  upon  the 
minor  civil  divisions  could  not  have  exceeded  $100,000,000. 

But  from  this  time  on,  the  practice  of  municipal  borrow- 
ing seems  to  have  spread  with  great  rapidity.  By  the  year 
1870,  the  combined  debts  of  cities,  towns,  counties,  and 
school  districts  amounted  to  $515,800,000 ;  and  during  the 
ten  years  that  followed,  $306,300,000  were  added  to  this  sum. 
These  figures,  it  should  be  noticed,  represent  the  amount  of 
outstanding  obligations  less  sinking-fund  accumulations. 
The  total  bonded  debt  of  the  inferior  corporations  was,  in 
1880,  $822,100,000. 

It  requires  but  a  slight  consideration  of  the  centers  from 


3^.4  LOCAL  DEFICIT  FmANCIEEING. 

whicli  tliis  grand  total  has  sprang  to  perceive  that  the  larger 
portion  of  existing  local  obligations  is  chargeable  to  the 
cities  and  large  towns.  The  sum  for  which  the  counties  are 
responsible  is  $123,800,000,  and  this  is  less  by  $64,000,000 
than  the  amount  due  in  1870.  The  township  debt  in  1880 
was  $31,600,000 ;  the  debt  of  the  school  districts  was  $17,- 
500,000  ;  while  that  of  the  towns  and  cities  with  a  population 
of  less  than  7,500  was  $55,800,000.  From  this  it  appears 
that  the  311  large  cities  and  towns  in  the  United  States  are 
responsible  for  considerable  more  than  half  of  all  local  debts. 
Nor  do  the  above  figures  adequately  present  the  tende^icy 
toward  the  employment  of  credit  that  comes  with  increasing 
density  of  population;  as  between  the  cities  themselves, 
greater  looseness  in  fiscal  methods  may  be  observed  as  muni- 
cipal numbers  extend.  The  average  per  capita  debt  of  all 
the  cities  in  the  United  States  is  $51.15.  Twenty-one  of  these 
cities  contain  each  a  population  of  100,000  and  over,  and  of 
this  number  there  are  but  five  that  fall  below  the  average  in 
their  per  capita  indebtedness,  while  the  obligations  of  many 
of  them  pass  far  beyond  that  of  the  average  city.  Thus  the 
per  capita  debt  of  Jersey  City  is  $127.45  ;  that  of  New  York 
city  is  $90.71 ;  that  of  Pittsburgh  is  $90.38 ;  that  of  Provi- 
dence is  $89.39  ;  while  Cincinnati,  New  Orleans,  Philadel- 
phia, and  others,  do  not  fall  far  below  those  already  men- 
tioned. From  a  careful  analysis  of  local  financiering  for  the 
ten  years  following  the  year  1876  it  is  observed  that  the 
rate  of  increase  of  indebtedness  in  large  cities  stands  to  the 
rate  of  increase  in  small  cities  in  the  ratio  of  187  to  98.^  The 
twelve  cities  taken  to  represent  the  former  class  are  New 
York,  Philadelphia,  Boston,  Chicago,  Cincinnati,  St.  Louis, 
Baltimore,  San  Francisco,  New  Orleans,  Brooklyn,  Louis- 
ville, and  Pittsburg ;  while  in  the  second  class  are  included 
Allegheny,  Columbus,  Chelsea,  Davenport,  Fort  "Wayne, 
New  Haven,  Paterson,  St.  Paul,  Taunton,  Troy,  Utica,  and 

'  Cf.  "  Report  of  the  Commission  to  Devise  a  Plan  for  the  Government  of 
the  Cities  of  the  State  of  Pennsylvania,"  pp.  96-103. 


MUNICIPAL  INDEBTEDNESS.  345 

Burlington.     The  comparison  of  tlie  fiscal  condition  of  these 
two  classes  of  municipalities  is  quite  interesting : 

Financial  condition  of  twelve  large  cities. 

Aggregate  increase  of  debt  in  ten  years 187  per  cent. 

Aggregate  increase  of  valuation  in  ten  years 74    "      " 

Aggregate  increase  of  taxation  in  ten  years 86     "      " 

Aggregate  increase  of  population  in  ten  years 88     "      " 

Amount  of  debt  per  capita  of  population $86.50. 

Financial  condition  of  twelve  small  cities. 

Aggregate  increase  of  debt  in  ten  years 98  per  cent. 

Aggregate  increase  of  valuation  in  ten  years 121     "      " 

Aggregate  increase  of  taxation  in  ten  years 108     "      " 

Aggregate  increase  of  population  in  ten  years 42    "      " 

Amount  of  debt  per  capita  of  population $26.50. 

One  may  not,  however,  properly  conclude  that  the  finan- 
cial government  of  the  small  cities  is  above  criticism,  for  not 
a  few  of  them  rival  theu-  more  populous  neighbors  in  the 
recklessness  of  their  appeals  to  public  credit.  The  State  of 
Maine  enjoys  the  unenviable  distinction  of  containing  four  of 
the  most  heavily  bonded  cities  in  the  Union.  The  average 
per  capita  indebtedness  of  all  her  cities  is  $98.78.  Bath,  a 
little  town  of  about  8,000  inhabitants,  bears  a  per  capita  debt 
of  $216.69;  the  per  capita  debt  of  Bangor  is  $157.87;  that 
of  Portland  is  $127.84 ;  that  of  Kockland  is  $129.88.  The 
condition  of  Elizabeth,  ISTew  Jersey,  is  well  known.  With  a 
population  of  28,000,  she  owes  more  than  $5,000,000,  which 
■  is  a  per  capita  charge  of  $195.  The  consequence  is  that  the 
value  of  her  property  has  rapidly  deteriorated,  and  that  a 
city  whose  position  presents  many  attractions  for  the  estab- 
lishment of  a  wharfage  and  loading  business  has  ceased  to 
grow. 

It  is  also  a  significant  fact  that  municipal  debts  have 
grown  more  rapidly  than  taxable  property  or  population. 
According  to  the  report  of  the  Pennsylvania  Commission, 
a  carefully  prepared  table  showing  the  increase  of  popula- 
tion, taxable  valuation,  taxation,  and  indebtedness  of  fifteen 


346  LOCAL  DEFICIT  FINANCIERING. 

of  the  principal  cities  of  the  United  States,  from  1860  to 
1875,  exhibits  the  following  results : 

Increase  in  population 70-5  per  cent. 

Increase  in  taxable  valuation 156'9     "      " 

Increase  in  debt 270-9     "      " 

Increase  in  taxation 3632     "      " 

Such  facts  as  these  might  be  multiplied  without  limit,  but 
so  frequently  have  they  been  brought  to  public  notice  that 
they  are  no  longer  regarded  with  surprise,  although  they  may 
be  read  with  solicitude.  Nor  will  it  aid  my  present  purpose 
to  dwell  longer  upon  the  recital  of  details.  The  main*fact 
is  sufficiently  weU  recognized.  The  States  have  ceased  to 
employ  largely  their  public  credit,  and  the  cities  and  minor 
civil  divisions  have  come  forward  as  the  chief  borrowers  of 
money.  It  is  the  aim  of  the  present  chapter  to  seek  an  ex- 
planation for  this  recent  change  in  the  balance  of  local  in- 
debtedness, and  to  correlate  this  tendency  with  other  observed 
facts  of  national  and  social  growth.  It  is  essential  that  this 
tendency  be  well  understood,  for  then  only  can  its  true  char- 
acter be  determined.  Is  it  open  to  full  condemnation,  or 
may  it  in  part  be  commended  ?  So  far  as  it  comes  under  just 
censure,  wherein  lies  the  responsibility  for  the  evils  which  it 
entails,  and  what  is  the  nature  of  the  remedy  that  may  arrest 
the  further  extension  of  so  dangerous  a  tendency  ?  Such  are 
the  questions  that  now  claim  our  attention. 

The  financial  administration  of  local  affairs  in  England 
and  France  discloses  the  same  tendencies  respecting  the  use  of 
credit  as  make  their  appearance  in  the  United  States.  This 
fact  is  of  considerable  importance,  for  it  leads  us  to  expect 
that  the  causes  responsible  for  this  tendency  are,  in  part  at 
least,  of  a  general  rather  than  a  local  character.  In  France, 
for  example,  the  departments  were  wholly  free  from  debt 
until  the  rise  of  the  second  empire,  and  the  communes  were 
but  moderately  burdened ;  but  with  Napoleon  III  came 
lavish  expenditure  of  borrowed  money  throughout  the  entire 
country.  By  the  year  1869,  the  communes,  exclusive  of 
the  city  of  Paris,  were  indebted  to  the  sum  of  524,000,000 


MUNICIPAL  INDEBTEDNESS.  347 

francs;  in  1872  these  obligations  had  increased  to  Y10,800,- 
000,  and  in  1876  to  757,400, 000.^  The  debt  of  Paris  grew 
with  significant  rapidity  upon  the  establishment  of  the  im- 
perial government,  nor  can  it  be  said  that  the  administra- 
tion of  the  republic  has  in  any  degree  checked  the  tenden- 
cy. In  1865  the  indebtedness  of  the  capital  city  was  but 
60,000,000  francs;  in  1872  it  had  increased  to  1,130,000,- 
000,  and  by  1880  had  attained  the  enormous  figure  of  2,295,- 
000,000.-  The  principal  branch  of  municipal  expenditure  at 
tlie  present  time  is  chargeable  to  the  account  of  interest 
and  sinking-fund,  demanding  annually  nearly  100,000,000 
francs.^ 

In  England  the  same  tendency  is  to  be  observed  in  the 
administration  of  local  affairs.  The  indebtedness  of  England 
and  Wales,  secured  by  local  rates  and  dues,  was  in  1880 
£137,000,000,  being  an  increase  of  £73,600,000  in  nine 
years.  The  local  indebtedness  of  Scotland  in  1881  was  £16,- 
300,000.*  The  per  capita  debt  of  Birmingham  is  £14 ;  of 
Manchester,  £16 ;  of  Leeds,  £12.^  The  cities  of  Northern 
Italy  have  followed  in  the  same  path,  while  those  of  Ger- 
many, although  less  encumbered  than  in  other  countries,  pre- 
sent many  instances  of  growing  indebtedness.  In  view  of 
such  facts,  it  is  useless  to  suppose  that  local  causes  can  ade- 
quately account  for  the  rise  of  local  debts. 

Still,  the  following  explanation  of  local  indebtedness  holds 
closely  to  facts  as  they  present  themselves  in  the  United 
States,  general  causes  being  admitted  only  so  far  as  they  are 
clearly  exemplified  in  the  history  of  this  country.  And  it 
may  be  well  to  state  at  the  outset  the  conclusions  that  will  be 
reached.  As  the  matter  lies  in  my  own  mind,  local  admin- 
istration, during  the  last  twenty-five  years,  has  been  largely 
shaped  by  three  facts.     These  are  as  follows : 

^  "feude  sur  la  Gestion  Financi^rc  en  France  depuis  ISYl,"  Noel,  p.  76. 

«  Martin's  "Year  Book,"  1884. 

»  "  The  Condition  of  Nations,"  G.  Fr.  Kolb,  pp.  219,  220. 

*  "Fenn  on  the  Funds,"  1883,  p.  39. 

*  A.  J.  Wilson  in  "Nineteenth  Century," N.  S.,  vol.  xxxv,  p.  410, 


348  LOCAL  DEFICIT  FTNANCIERING. 

1.  The  rapid  growth  of  urban  population  lias  imposed 
new  duties  upon  tliose  who  administer  local  affairs. 

2.  The  refusal  of  the  several  States  after  1845  to  further 
assist  in  the  opening  of  highways  of  commerce,  forced  the 
private  corporations,  into  whose  hands  the  business  fell,  to 
present  their  appeals  for  assistance  to  the  minor  civil  divis- 

iOLS. 

3.  The  imperfect  development  of  administrative  methods 
under  democratic  rule  has  invited  corruption  on  the  p>art  of 
local  oflScials. 

In  the  somewhat  extensive  literature  upon  this  subject, 
many  other  causes  have  been  assigned  for  the  facts  under 
consideration,  but  it  is  believed  that  all,  so  far  as  they  are 
pertinent  to  the  case,  may  be  referred  to  one  of  the  three  ex- 
pressed above.  These  will  claim  our  attention  in  the  order 
in  which  they  have  been  presented. 

Local  Debts  as  Influenced  hy  Rapid  Increase  of   Urban 
Population. 

Many  forces  have  contributed  to  introduce  changes  into 
the  social  and  industrial  life  of  the  nineteenth  century,  but 
none  have  exerted  a  more  marked  influence  than  the  devel- 
opment of  steam  transportation.^  Distance  has  been  anni- 
hilated so  far  as  trade  and  commerce  are  concerned,  and  the 
choice  of  a  spot  where  men  shall  build  for  themselves  a 
home  is  largely  independent  of  a  country's  topography.  At 
the  same  time  that  new  lands  have  been  rendered  available 
for  agricultural  purposes,  new  methods  have  been  discovered 
for  working  them,  and  in  this  manner  the  productiveness  of 
agricultural  labor  has  continually  increased.  There  is  thus 
presented  the  possibility  of  a  more  rapid  growth  of  urban 
than  of  rural  population.  The  United  States  is  properly 
said  to  be  an  agricultural  country ;  yet  during  the  last  thirty- 

'  For  an  interesting  presentation  of  this  subject,  compare  "  La  Transforma- 
tion des  Moyens  de  Transport,  et  des  Consequences  Economiques  et  Socials,"  by 
Alfred  de  Foville.  Also  "  National okonomik  des  Handels  und  Gewerbfleisses," 
by  Wilhelm  Roscher,  P.  I,  chs.  x  and  following. 


MUNICIPAL  INDEBTEDNESS. 


349 


five  years  the  city  population  has  increased  from  t"«'elve  in 
the  hundred  to  twenty-five  in  the  hundred.  The  following 
table,  taken  from  the  census  of  1880,  shows  the  proportion 
of  urban  and  rural  population  for  each  decade  since  1790. 

Table  showing  the  urban  population  of  the  United  States, 
1790-1880. 


DATE. 


1790 
1800 
1810 
1820 
1880 
1840 
1850 
1860 
1870 
1880 


Population  of 

the  United 

States. 

Number 

of 

cities. 

3,929,214 

6 

5,308,483 

6 

7,239,881 
9,633,822 

11 
13 

12,866,020 

26 

17,069,453 
23,191,876 
31,443,321 
38,558,371 
50,155,783' 

44 

85 

141 

226 

286 

Population 
of  tlie 
cities. 


131,472 

210,873 

356,920 

475,135 

864,509 

1,453,994 

2,897,586 

5,072,256 

8,071,875 

11,318,547 


Inhabitants  of  cities 

in  each  100  of  total 

population. 


3-3 

3-9 

4-9 

4-9 

6-7 

8-5 

12-5 

16-1 

20-9 

22-5 


This  movement,  shown  in  the  figures  here  presented,  is 
not  confined  to  the  United  States,  but  makes  its  appearance 
in  all  countries  that  have  adopted  modern  methods  of  in- 
dustry. Between  the  years  1833  and  1873,  the  nine  chief 
cities  of  Europe  doubled  in  the  number  of  their  inhabitants. 
IN'or  can  this  increase  in  city  population  be  assigned  to  the 
excess  of  the  birth-rate  over  the  death-rate  in  the  cities  them- 
selves.   The  to"wns  grow  because  they  feed  upon  the  country. 

An  estimate,  based  upon  returns  from  thirty-one  of  the 
largest  cities  of  Europe,  shows  that  of  every  thousand  increase 
in  urban  population,  two  hundred  and  fifteen  only  spring  from 
excess  of  death-rate  over  birth-rate.  The  census  of  1880 
shows  the  same  tendency  to  exist  in  the  United  States.  In 
very  many  parts  of  the  country  the  little  towns  of  eight  or 
ten  thousand  inhabitants  are  drawing  from  the  country  sur- 
rounding them,'  so  that  in  many  localities  the  farming  people 
are  actually  decreasing  in  numbers  even  in  agricultural  com- 
munities. This  is  the  case,  for  example,  in  the  southern  tier 
of  counties  in  the  State  of  Michigan. 


350  LOCAL  DEFICIT  FLNANCIERING. 

But  of  what  significance  is  tliis  movement  of  peoples 
from  tlie  country  into  the  towns  to  the  question  of  local  in- 
debtedness ?  There  is,  of  course,  no  necessary  relation  be- 
tween these  two  facts,  although,  under  the  influence  of  preva- 
lent ideas  respecting  the  funding  system,  and  taken  in  con- 
nection with  existing  rules  of  municipal  control,  the  one 
appears  to  follow  naturally  from  the  other.  As  cities  grow 
in  numbers  and  area,  new  duties  are  imposed  upon  their  gov- 
ernments, and  new  sources  of  expenditure  are  constantly 
opened ;  and  the  temptation  is  great  for  cities  to  find  imme- 
diate relief  by  drawing  bills  upon  the  future.  * 

There  are  those  who  claim  that  the  natural  result  of  an 
increase  in  population  is  a  decrease  in  the  necessary  burdens 
imposed  upon  those  who  pay  the  taxes,  a  view  clearly  pre- 
sented in  the  following  quotation  : 

Every  increase  in  the  population  of  a  city,  and  enlarged 
area  of  assessment,  should  normally  result  in  a  decrease  of  debt 
per  capita,  and  a  decrease  in  taxation  ;  because  both  the  natu- 
ral increase  of  the  population  and  the  increase  in  taxable  valu- 
ation of  properties  would  naturally  create  economies  in  all  the 
services  rendered  to  a  great  city  which  the  municipal  adminis- 
tration undertakes  to  supply.^ 

If  we  accept  this  view  of  the  case,  it  is  right  to  conclude 
that  the  natural  result  of  increasing  numbers  is  a  fall  in  the 
rate  of  taxation ;  but  it  is  doubtful  if  such  a  claim  can  be 
maintained,  for  it  rests  upon  the  assumption  that  the  growth 
of  a  city  means  merely  the  extension  or  duplication  of  what 
already  exists.  This,  however,  is  far  from  correct.  When  a 
city  or  a  town  doubles  its  population,  its  original  personality 
is  largely  lost.  It  has  changed  its  character  as  a  city,  and  is 
no  longer  confined  to  the  wants  it  once  felt,  nor  amenable  to 
the  rules  that  once  controlled  its  councils.  As  localities  come 
to  be  more  and  more  densely  settled,  not  only  are  new  duties 
imposed  upon  their  governments,  but  the  performance  of 
accustomed  duties  requires  greater  care  and  expenditure.   The 

■  Cf.  "  Cyclopaedia  of  Political  Science,"  article  on  "  Administration  of  Amer- 
ican Cities,"  by  Simon  Sterne. 


MUNICIPAL  INDEBTEDNESS.  351 

extension  of  the  police  department,  for  example,  must  be 
proportionally  more  rapid  than  the  growth  of  a  city  in  num- 
bers, for  density  of  population  breeds  crime.  The  same  is 
true  of  the  health  department.  Disease  springs  from  filth, 
and  filth  is  the  natural  consequence  of  crowded  quarters. 
Cleanliness  can  not  be  expected,  where  many  j)eople  are 
packed  together,  unless  made  the  care  of  the  government ; 
and  the  difficulty  of  keeping  a  city  clean  is  increased  as  tene- 
ment-houses multiply.  In  a  small  town  the  demand  for 
water  may  be  cheaply  met ;  but  double  the  numbers,  and  a 
sufficient  water-supply  frequently  becomes  the  occasion  for 
great  expense.  It  is  the  same  with  sewerage,  streets,  and 
pavements.  Dirt  roads  and  surface  drainage  do  not  answer 
for  populous  cities.  JSTew  wants,  also,  are  developed  by 
growth.  A  country  village,  where  land  is  cheap,  and  each 
house  may  be  surrounded  by  its  grass-plot,  is  in  no  need  of  a 
public  park  ;  but  in  a  densely  crowded  city  these  breathing- 
places  are  essential  for  morals  as  well  as  health.  There  are, 
too,  many  forms  of  gratification  which  lie  beyond  the  purse 
of  a  small  community,  but  which  may  be  enjoyed  at  slight 
expense  to  each  citizen  when  large  numbers  combine  in  pay- 
ing for  them.  Such  are  public  libraries,  the  higher  grade  of 
education,  public  driving-parks  and  boulevards,  city  decora- 
tions, and  the  like.  It  seems,  then,  that  the  legitimate  needs 
of  a  growing  city  extend  at  a  more  rapid  rate  than  the 
growth  itself.  A  developing  society  must  of  necessity 
make  continually  larger  demands  upon  government,  for  the 
principle  of  common  property  under  public  management  ex- 
tends to  new  objects,  and  embraces  new  purposes,  as  a  com- 
munity grows  in  numbers  or  in  riches.  It  is  then  hardly 
correct  to  say,  as  the  author  from  whom  we  have  quoted  has 
said,  that "  the  natural  increase  of  the  population  .  .  .  would 
naturally  create  economies  "  in  the  services  rendered  by  the 
government.  The  natural  result  of  an  increase  in  popula- 
tion is  to  create  new  wants,  and  to  demand  an  extension  of 
the  tax-levy. 

But  again,  the  conclusion  that  economy  comes  with  an 


352  LOCAL   DEFICIT  FINANCIERING. 

increase  of  municipal  numbers  erroneously  assumes  tliat  the 
principle  of  division  of  labor  is  of  extensive  application  in 
the  business  of  government.  In  many  forms  of  manufact- 
uring it  is  true  that  the  larger  the  number  of  laborers  em- 
ployed the  lower  the  cost  of  production.  There  is  economy 
in  union  of  action,  and  union  of  action  is  always  possible 
when  there  is  an  assured  market  for  the  service  rendered. 
But  it  is  equally  true  that  this  economic  principle  is  limited 
in  its  application.  Not  all  forms  of  useful  service  can  be 
rendered  cheaper  when  rendered  for  a  large  constituency, 
and  among  the  notable  exceptions  to  this  rule  is  the  business 
of  government  in  many  of  its  branches.  There  is,  therefore, 
no  reason  to  conclude  that  the  growth  of  a  city  will  naturally 
lead  to  a  decrease  in  the^er  capita  expenditure,  even  though 
we  leave  out  of  the  account  the  extending  duties  which 
growth  imposes. 

The  question  here  brought  to  view  is  a  very  important 
one,  and  should  be  considered  in  all  its  phases.  Following, 
then,  a  step  further  the  opinion  expressed  by  Mr,  Sterne,  we 
are  led  next  to  inquire  if  "  the  increase  in  the  taxable  valua- 
tion of  properties  naturally  creates  economies  in  the  services 
rendered  to  a  great  city "  ?  The  facts  pertaining  to  valua- 
tion of  taxable  property  do  offer  some  support  to  such  a  con- 
clusion. It  is  in  general  true  that  the  average  wealth  of 
citizens  increases  with  the  increase  in  municipal  numbers, 
although  it  is  very  easy  to  overestimate  the  importance  of 
this  fact.  It  has  been  estimated  that  the  per  capita  valua- 
tion of  property  in  the  larger  cities  increased  50  per  cent 
from  18G0  to  1875  ;  but  no  reliance  can  be  placed  upon  such 
a  conclusion  as  indicating  normal  tendencies  in  values,  be- 
cause the  period  considered  includes  the  years  of  civil  war 
and  paper  currency.  A  similar  estimate,  including  in  its 
view  the  ten  years  following  18G5,  shows  the  increase  in  per 
capita  valuation  to  be  but  23  per  cent,  while  for  second-class 
cities  the  tendency  seems  to  be  in  the  opposite  direction.  It 
is,  of  course,  impossible  to  lay  down  any  rule  by  which  the 
increasing  needs  of  cities  in  general  may  be  measured  against 


MUMCIPAL  INDEBTEDNESS.  353 

their  increasing  ability  to  pay  cash  for  services  rendered ; 
but  there  is  much  reason  for  believing  that  the  legitimate 
demands  of  a  growing  city  will  outrun  its  ability  to  provide 
for  them  while  maintaining  the  same  rate  of  taxation.  If 
this  be  accepted  as  correct,  one  can  not  say  that  an  extension 
of  the  basis  upon  which  taxes  are  computed  will  "create 
economics,"  although  such  influence  as  it  exerts  lies  in  that 
direction. 

But,  notwithstanding  increased  valuation,  there  are  spe- 
cial reasons  why  growing  demands  invite  an  appeal  to  loans. 
The  riches  that  come  to  a  city  with  extension  of  numbers  are 
unequally  distributed.  The  average  wealth  of  the  commu- 
nity may  increase,  but  the  ability  of  the  average  man  to  pay 
taxes  decreases.  It  follows,  therefore,  that  an  extension  of 
the  tax-levy,  consequent  upon  an  increase  in  numbers,  calls 
for  payments  in  continually  larger  amounts  from  those  who 
are  wealthy;  and  it  is  this  consciousness  of  increased  bur- 
dens, taken  in  connection  with  the  knowledge  that  munici- 
pal growth  extends  business  and  enhances  the  value  of  real 
estate,  which  inclines  men  of  wealth  so  readily  to  acquiesce 
in  an  issue  of  bonds. 

The  mention  of  the  words  real  estate  suggests  another 
reason  why  ambitious  cities  are  so  willing  to  incur  heavy  in- 
debtedness. In  new  and  rapidly  developing  communities 
there  is  always  an  opportunity  for  men  who  have  secured  an 
interest  in  the  soil  of  a  particular  locality  to  make  large 
sums  of  money  if  only  the  tide  of  migration  may  be  allured 
to  come  their  way.  The  motives  that  lead  men  to  select  one 
spot  as  a  home  rather  than  another  are  frequently  very 
slight,  and  sometimes  without  basis.  A  good  pavement  on 
the  street,  a  fine  school-house,  a  public  park,  an  imposing 
court-house,  or  any  public  work  that  indicates  what  business- 
men call  "  enterprise,"  will  be  apt  to  prove  more  persuasive 
than  the  boast  of  a  "  slow  town  "  that  her  finances  have  been 
conservatively  managed.  Land  agents  must  be  furnished 
with  fitting  topics  of  eloquence  ;  and  if  Nature  has  bestowed 
her  bounties  with  equal  hand,  so  that  one  locality  is  very  like 


354  LOCAL  DEFICIT  FINANCIERING. 

another,  tliese  subjects  of  discourse  must  be  artificially  pro- 
vided. In  this  manner  it  comes  about  that  the  bonding  of  a 
town,  and  the  expenditure  of  the  money  procured  in  showy 
works,  is  the  occasion  of  actual  gain  to  those  who  speculate 
in  real  estate ;  for  the  pubhc  burdens  are  in  the  beginning 
but  shghtly  increased  on  account  of  the  money  borrowed, 
the  money  is  expended  so  as  to  allure  settlement,  and  this 
secures  a  market  for  real  property  at  constantly  enhanced 
prices. 

The  mischief  of  such  a  procedure  would  not  be  so  great 
if  confined  to  a  single  town,  but  there  is  no  reason  why 
neighboring  localities  may  not  adopt  the  same  tactics  with 
the  same  end  in  view.  In  such  a  case,  it  is  known  that  suc- 
cess depends  upon  the  comparative-  excellence  of  the  show- 
ing, and  there  consequently  springs  up  local  rivalry  in  the 
building  of  public  improvements  and  in  lending  public 
credit  to  private  corporations.  It  is  true  that  this  policy 
may  be  carried  so  far  as  to  defeat  itself,  for  the  settler  is  not 
blind  to  the  fact  that  the  bonds  of  a  city  are  an  incumbrance 
upon  any  property  he  may  acquire  within  its  limits.  But 
whether  successfully  managed  or  not,  it  results  in  a  great  in- 
crease of  unnecessary  debt,  and  it  can  not  be  denied  that 
many  of  our  smaller  cities  and  towns  can  trace  the  origin  of 
their  debt  to  the  agitation  of  speculators  in  real  estate.  In- 
deed, we  are  fully  prepared  to  accept  the  testimony  of  the 
Pennsylvania  Commission  of  1878,  "  that  the  undue  accumu- 
lation of  debt  in  most  of  the  cities  of  the  State  of  Pennsyl- 
vania has  been  the  result  of  a  desire  for  speculation  on  the 
part  of  owners  of  property  themselves."  ^  And  in  explana- 
tion of  this  it  is  added :  "  Large  tracts  of  land  outside  the 
built-up  portions  of  cities  have  been  purchased,  combinations 
made  by  men  of  wealth,  and  councils  besieged,  until  they 
have  been  driven  into  making  appropriations  to  open  and  im- 
prove streets  and  avenues  largely  in  advance  of  the  real  ne- 
cessities of  the  city.    In  many  of  these   cases,   owners  of 

»  Cf.  Report,  p.  6. 


MUNICIPAL  INDEBTEDNESS.  355 

property  need  more  protection  against  themselves  than  against 
the  non-property-holding  class." 

The  unprecedented  growth  of  urban  population  since 
1860  is  not  urged  as  an  apology  for  the  funding  system  in 
local  affairs,  nor  as  a  defense  of  those  who  have  controlled 
municipal  administration.  But  certainly  the  facts  recited 
show  how  great  is  the  temptation  to  issue  municipal  bonds. 
New  demands  constantly  arise,  and  taxes  rest  upon  those 
who  have  money  with  constantly  increasing  weight.  Prop- 
erty meantime  rises  in  value,  and  business  of  all  sorts  ex- 
pands. Under  such  conditions  it  does  not  seem  inexpedient 
to  mortgage  the  future  prosperity  of  a  city.  The  readiness 
with  which  credits  are  voted  is  one  of  the  natural  results 
of  that  optimism  always  felt  by  members  of  a  growing  cor- 
poration. 

Local  Debts  in  their  Relation  to  Development  of  Highways 
of  Commerce. 

In  further  explanation  of  local  debts,  it  will  be  necessary 
to  continue  our  study  of  the  last  chapter  pertaining  to  public 
assistance  of  railroads  and  canals.  As  will  be  remembered, 
the  course  of  financiering  there  portrayed  came  to  a  disastrous 
close.  The  State  treasuries  failed  to  meet  their  obligations 
out  of  the  income  of  such  public  works  as  had  been  estab- 
lished, and  the  people  found  themselves  burdened  with  in- 
creased taxes  to  pay  the  accruing  interest  on  "  public  improve- 
ment bonds."  This  occasioned  a  revulsion  of  feeling  so  in- 
tense that  the  organic  laws  of  many  of  the  States  were 
radically  modified,  and  the  entire  control  of  artificial  high- 
ways of  commerce  was  thrown  into  the  hands  of  private 
corporations.  "While  the  lesson  of  this  failure  was  fresh  in 
the  minds  of  the  people,  there  appears  to  have  been  no  de- 
mand that  governments  should  employ  their  sovereign  credit 
to  collect  capital  for  public  works. 

It  was  not  long,  however,  before  the  public  again  appealed 
to  governmental  agencies  for  direct  assistance  in  reclaiming 
new  territory.     The  Federal  government  responded  most 


356  LOCAL  DEFICIT  FINANCIERING. 

willingly,  by  making  liberal  appropriations  of  lands  to  rail- 
road corporations,  and  the  States,  although  prohibited  by 
their  organic  laws  from  rendering  direct  assistance,  yet  dis- 
covered a  way  of  granting  material  aid.  The  minor  civil 
divisions  ^w^re  not  included  in  the  disabhng  acts  of  the  new 
or  amended  constitutions.  Being  creatures  of  the  legisla- 
tures, their  powers  were  determined  by  the  legislatures,  and 
it  was  no  difficult  task  to  obtain  for  them  authority  to  is^e 
bonds  in  favor  of  private  corporations.  Such  a  method  of 
procedure  appears  to  me  to  have  been  wholly  without  de- 
fense, but  upon  that  question  we  can  not  now  enter.  As  a 
result  of  this  policy,  we  find  that  in  1880  township  and  city 
bonds  amounted  to  $185,000,000,  being  a  sum  equal  to  one- 
sixth  of  the  total  of  local  indebtedness.  Nor  did  this  per- 
nicious tendency  stop  with  the  issue  of  railroad  bonds. 
Credit-financiering  as  a  part  of  local  administration  became 
familiar  to  the  people,  and  it  was  but  a  step  to  the  con- 
clusion that  other  entei'prises  more  nearly  of  a  private  na- 
ture might  rightfully  receive  the  assistance  of  the  local 
treasuries. 

But  it  may  be  asked  :  What  right  has  a  legislature  to  au- 
thorize a  township  or  a  city  to  do  that  which  by  public  law 
it  is  itself  prohibited  from  doing  ?  This  is  a  question  that 
has  been  raised  in  many  of  the  States.  When  presented  to 
the  Supreme  Court  of  Michigan  it  was  held  that  the  legis- 
lature possessed  no  such  authority  as  it  had  assumed,  and  a 
law  empowering  towns  to  loan  their  credit  for  private  pur- 
pose was  declared  unconstitutional.  The  Supreme  Court  of 
Iowa  pronounced  a  similar  decision,  but  this  decision  was 
afterward  reversed.  In  many  other  States  the  same  point 
was  raised,  but  in  all,  with  the  exception  of  Michigan,  the 
courts  were  subservient  to  the  manifest  wish  of  the  people, 
and  supported  the  laws  granting  to  municipalities  the  power 
to  issue  railroad  bonds.     And  there  is,  in  truth,  much  to  be 

1  Previous  to  1880  Congress  had  granted  215,000,000  acres  of  land  to  rail- 
roads and  canals,  of  which  titles  were  secured  to  150,000,000  acres. 


MUNICIPAL  INDEBTEDNESS.  357 

said  for  such  decisions,  for,  after  all,  the  decision  of  a  court 
is  but  the  conservative  expression  of  the  popular  "will. 

It  is  not,  however,  with  a  view  of  discussing  the  legal 
principle  involved  that  this  question  was  brought  to  our 
notice,  but  rather  to  show  tliat  the  relation  here  traced  be- 
tween the  restrictions  imposed  upon  the  States  by  their  con- 
stitutions, and  the  issue  of  local  bonds  for  granting  assistance 
to  raihoads,  exists  in  reality,  and  not  in  fancy.  It  is  found 
in  the  legal  thinking  of  the  country,  and  makes  its  appear- 
ance in  many  of  the  cases  brought  before  the  courts  which 
involve  the  validity  of  railroad  bonds.^  It  is  not,  then,  an 
accident  that  the  expansion  of  local  credit  took  place  almost 
immediately  after  the  States  had  been  shoved  off  the  stage 
of  industrial  action ;  indeed,  one  is  warranted  in  the  sugges- 
tion at  least  that,  had  the  States  been  free  from  the  legal 
restrictions  imposed  upon  them  by  their  constitutions,  the 
inferior  governments  would  never  have  been  thus  forced  to 
respond  to  the  popular  clamor  for  a  collection  of  capital 
by  governmental  agency. 

Local  Debts  in  their  Relation  to  Questions  of  Local  Govern- 
ment. 

It  is  probable  that  the  large  majority  of  men  regard  cor- 
rupt practices  in  the  administration  of  cities  as  the  main 
source  of  local  debts,  and  it  is  unfortunately  true  that  cor- 
ruption in  politics  is  in  large  measure  responsible  for  the 
evils  of  local  financiering.  Perhaps  no  municipality  has  suf- 
fered more  from  falling  into  the  hands  of  political  Philistines 
than  the  city  of  New  York.  This  city  was  mulcted  of  $15,- 
000,000  in  a  single  year  by  a  corrupt  ring  of  officials,  and  it 
is  estimated  that  one  half  of  her  present  debt  is  due  to  ex- 
travagance and  fraud.  Other  localities  have  suffered  in  the 
same  manner,  though  possibly  in  a  less  degree.  But  an 
investigation  into  municipal  indebtedness,  which  proceeds  no 
further  than  to  lay  bare  the  fact  of  political  corruption,  can 

*  Cf.  Bay  City  vs.  State  Treasurer,  "  Michigan  Reports,"  23,  p,  504. 
24 


358  LOCAL  DEFICIT  FINANCIERING. 

not  hope  to  add  any  pertinent  suggestion  for  the  solution  of 
the  problem  of  local  government.  It  is  believed  that  the 
analysis  which  follows  does  take  one  step  in  advance  of  the 
views  commonly  held.  Admitting  official  corruption  to  be 
directly  responsible  for  much  of  the  looseness  in  financial 
administration,  it  points  to  the  fact  that  the  present  organiza- 
tion of  cities,  and  the  existing  structure  of  society  in  which 
they  are  imbedded,  invite  to  such  corruption.  This  is  an  im- 
portant fact  if  true,  for  it  shows  that  the  problem  of  local 
government  is  not  an  isolated  problem,  but  rather  a  subor- 
dinate part  of  the  great  social  problem  now  pressing  so 
urgently  for  solution. 

But,  before  undertaking  to  show  the  ground  upon  which 
Bueh  a  claim  rests,  it  may  be  well  to  notice  some  of  the  cur- 
rent proposals  for  introducing  honesty  into  municipal  affairs. 
And  first,  what  can  be  said  of  the  cry  that  politics  must  be 
purified?  This  is  undoubtedly  true.  The  purification  of 
politics  is  a  continuous  task,  like  the  cleansing  of  the  streets 
of  a  great  city,  or  the  renewing  of  a  right  purpose  within  the 
human  heart.  The  common  meaning  of  this  phrase  is  that 
"good  men"  should  be  elected  to  office,  but  the  inadequacy 
of  this  as  a  practical  measure  will  at  once  appear  when  one 
asks  who  these  "  good  men  "  are  whom  it  is  proposed  to  in- 
trust with  public  affairs.  They  are  always  men  out  of  office, 
and  most  frequently  men  whose  tastes  do  not  incline  them 
to  undertake  a  public  career.  Indeed,  as  things  now  are,  the 
fact  that  a  man  is  desirous  to  secure  an  election  is  presump- 
tive evidence  that  he  is  not  the  "  good  man  "  whom  the  peo- 
ple want.  It  seems,  then,  that  purification  of  politics  means 
that  certain  individuals  should  sacrifice  their  personal  inclina- 
tions to  the  pubhc  good  ;  while  those  to  whom  public  duties 
are  agreeable,  and  who  for  that  reason  might  be  expected  to 
serve  the  public  well,  are  on  that  account  to  be  forced  into 
the  background.  It  is  true  that  exigencies  may  arise  when 
every  citizen  should  be  willing  to  make  personal  sacrifices 
for  the  public  good  ;  but  there  must  be  something  wrong  in 
a  Bociety  whose  normal  weKare  demands  continual  sacrifice, 


MUNICIPAL  INDEBTEDNESS.  359 

for  a  truly  organized  society  should  pay  just  regard  to  the 
personal  inclinations  of  its  members.  There  is,  in  truth,  noth- 
ing tangible  about  this  phrase,  purification  of  politics.  It  is 
largely  cant,  and  is  as  frequently  used  by  corrupt  men  as  by 
men  of  honest  purpose. 

Perhaps  the  most  popular  remedy  for  corruption  in 
municipal  affairs  is  found  in  the  claim  that  city  suffrage 
should  be  placed  on  a  property  basis.  This  proposal  presents 
itself  in  many  forms,  but  the  principle  involved  in  them  all, 
as  also  the  reasoning  upon  which  they  all  rest,  is  the  same. 
Among  the  most  conservative  of  these  proposals  is  the  one 
found  in  the  report  of  a  commission  appointed  by  the  Gov- 
ernor of  the  State  of  New  York  "to  devise  a  plan  for  the 
government  of  cities."  It  was  proposed  by  this  commis- 
sion that  a  "  Board  of  Finance "  should  be  elected  in  every 
city  of  the  State.  In  cities  containing  over  one  hundred 
thousand  inhabitants,  this  board  was  to  be  elected  "  by  elect- 
ors of  the  city  (otherwise  qualified  under  Article  II  of  the 
Constitution)  who  shall,  for  two  years  next  preceding  the 
election,  have  paid  an  annual  tax  on  property  owned  by  them, 
and  oflScially  assessed  for  taxation  in  such  city,  of  the  as- 
sessed value  of  not  less  than  five  hundred  dollars,  or  shall 
have  actually  paid  during  the  same  period  a  yearly  rent  for 
premises  in  said  city,  occupied  by  them  for  purposes  of  resi- 
dence or  lawful  business,  of  not  less  than  two  hundred  and 
fifty  dollars."  For  cities  containing  a  less  number  of  in- 
habitants, the  pecuniary  requirements  for  the  privilege  of 
suffrage  were  somewhat  modified,  but  the  principle  stated 
was  applied  to  all.  It  was  further  provided  that  all  initia- 
tive in  matters  pertaining  to  expenditure  and  taxation 
should  rest  with  the  "  Board  of  Finance."  Objections  pre- 
sented by  the  mayor  could  be  disregarded,  and  it  was  specifi- 
cally stated  that  "  no  power  vested  in  the  Board  of  Finance 
shall  be  conferred  on  or  exercised  by  the  Board  of  Alder- 
men." 

It  requires  neither  extended  reading  in  history  nor  a 
penetrating  knowledge  of  practical  affairs  to  perceive  what 


360  LOCAL  DEFICIT  FINANCIERING. 

this  proposal  means.  The  man  who  holds  the  purse-strings 
wields  the  scepter.  And  since  this  board  is  created  by  votes 
representing  property,  the  result  of  granting  it  authority 
would  be  to  establish  city  government  on  a  property  basis. 
Such  a  proposal  demands  careful  scrutiny  before  it  can  meet 
with  hearty  approval. 

Admitting  for  the  moment  the  principle  involved,  it  is, 
under  present  conditions,  impossible  to  restrict  suffrage  to 
property  owners.  The  people  in  the  United  States  regard 
manhood  suffrage  as  the  bulwark  of  personal  liberty ;  and, 
looking  into  past  history,  which  after  all  is  the  source  of 
popular  prejudice,  whether  among  the  learned  or  the  igno- 
rant, they  have  reason  for  such  a  belief.  But  tliis  plan  of  the 
New  York  commission  proposes  a  curtailment  of  suffrage,  a 
measure  which  can  only  be  carried  through  by  the  exercise 
of  suffrage.  The  question  then  resolves  itself  to  this  :  Will 
men  vote  to  deprive  themselves  of  the  right  to  vote  ?  The 
only  chance  of  securing  such  a  reform  lies  in  the  fact  that 
laws  governing  cities  emanate  from  the  State  legislature,  and 
that  this  body  may  for  a  time  be  dominated  by  those  who 
live  in  the  country.  But  who,  knowing  the  jealousies  that 
exist  between  country  and  town,  can  hope  for  a  permanent 
law  restricting  in  any  degree  the  political  rights  of  citizens 
in  municipalities  ?  For  it  must  be  remembered  that  the  men 
whose  privileges  are  thus  curtailed  in  the  'cities  would  still 
be  voters  in  all  State  elections,  and,  this  being  the  case,  we 
may  be  sure  that  the  question  of  municipal  suffrage  would 
not  quickly  disappear  from  State  politics.  The  plan  is  alto- 
gether  impracticable.  The  only  path  to  restricted  suffrage 
in  this  country  lies  through  two  revolutions  :  the  one  result- 
ing in  the  establishment  of  a  Dictatorship,  the  other  in  the 
re-establishment  of  a  Eepublic  in  which  votes  shall  repre- 
sent wealth.  They  who  are  not  willing  to  adopt  drastic 
remedies  of  this  sort,  but  who  yet  advocate  that  property 
owners  in  cities  should  control  all  finance  bills,  err  in  the 
same  manner  as  a  physician  who  prescribes  medicine  so 
Btrong  that  the  stomach  of  his  patient  can  not  retain  it. 


MUNICIPAL  INDEBTEDNESS.  361 

But  can  we  admit  tlie  principle  involved  ?  The  line  of 
reasoning  which  favors  the  proj^osal  to  restrict  municipal 
suffrage  to  property  owners  is,  upon  its  face,  quite  plausible. 
It  starts  from  the  assumption  that  the  duties  imposed  upon  a 
city  government  are  either  political  in  their  nature,  or  per- 
tain to  the  co-operative  management  of  private  property.  So 
far  as  these  municipal  duties  are  political,  it  is  admitted  that 
all  citizens  should  be  granted  a  voice  in  their  control ;  but  so 
far  as  they  pertain  to  property,  it  is  thought  to  be  an  imper- 
tinence on  the  part  of  men  w^ithout  property  to  interfere. 
This  argument  is  nowhere  better  formulated  than  in  the  in- 
teresting article  by  Mr.  Simon  Sterne  already  referred  to. 
The  author  supports  his  case  with  intellectual  vigor  and 
many  references  to  history. 

Two  mistaken  roads  [says  Mr.  Sterne]  seem  to  have  been 
followed  in  all  legislation  in  this  country  as  to  cities,  and 
which  have  resulted  in  disaster.  Insufficient  analysis  has  pre- 
vented our  people  from  seeing  that  a  city  is  at  one  and  the 
same  time  a  decentralized  portion  of  the  general  government 
of  the  State,  and  a  co-operative  organization  of  property  owners 
for  the  administration  of  private  property.  The  mayor,  when 
he  enforces  an  ordinance  for  the  preservation  of  the  public 
health  ...  is  a  public  State  officer  deriving  his  authority  from 
the  suffrages  of  the  citizens  in  whose  midst  he  holds  sway. 
The  mayor,  when  he  signs  an  ordinance  for  the  grading  and 
regulating  of  a  street  between  certain  avenues,  ...  is  a  mere 
instrument  to  make  and  enforce  a  contract  between  property 
owners.  [The  people  who  own  the  property  through  which 
streets  are  to  be  cut  can  not  come  to  an  agreement,]  and  there- 
fore the  law  makes  contracts  through  the  instrumentality  of 
the  mayor  for  them.^ 

The  author  then  proceeds  to  analyze  the  various  duties 
commonly  imposed  on  public  officials,  and  to  label  one  set 
public  and  the  other  set  private.  Street  lighting,  for  ex- 
ample, is  undertaken  by  the  local  government  in  its  capacity 
as  the  representative  of  property  owners  ;  the  police  power, 
on  the  other  hand,  is  regarded  as  a  power  distinctively  gov- 

'  "Cyclopaedia  of  Political  Science,"  Article,  "Administration  of  American 
Cities." 


362  LOCAL  DEFICIT  FINANCIERING. 

emmental  in  character.  In  support  of  sucli  a  distinction,  the 
author  refers  to  the  fact  that  in  olden  times  rich  people  used 
to  hang  lanterns  out  on  the  corners  of  their  houses,  and  hire 
linkboys  to  carry  torches  before  them  on  dark  nights.  This 
appeal  to  history,  however,  is  unfortunate.  The  truth  with 
regard  to  public  lighting  is  that  this  service  was  brought 
under  the  control  of  municipal  government  in  order  the 
more  perfectly  to  administer  the  police  duties.  It  is  be- 
cause a  lighted  city  prevents  crime,  and  not  because  it  is 
disagreeable  for  one  with  pohshed  boots  to  step  in  the 
mud,  that  public  lighting  is  supported  from  the  proceeds  of 
taxes. 

"We  can  not,  however,  trace  the  course  of  this  argument  in 
detail.  Though  it  presents  several  inconsistencies,  and 
though  it  makes  irrelevant  apd  inaccurate  appeals  to  history, 
the  chief  criticism  that  lies  against  it  consists  in  the  errone- 
ous conception  of  government  upon  which  it  is  built.  All 
clear  thinking  on  matters  pertaining  to  government  must  be- 
gin by  recognizing  that  the  state  is  the  repository  of  the  coer- 
cive principle  of  society,  and  that  this  constitutes  its  only  es- 
sential and  permanent  characteristic.  It  is  necessary  that  force 
should  be  employed  for  the  performance  of  any  duty  calling 
for  the  general  consent  of  large  numbers  of  men,  and  wher- 
ever one  may  trace  the  exercise  of  force,  according  to  estab- 
lished law  or  custom,  there  he  discovers  state  agency.  It 
is  unnecessary  to  prove  this,  for  it  is  the  fundamental  con- 
ception upon  which  all  civil  jurisprudence  rests,  and  finds 
expression  in  the  writings  of  all  publicists  who  manifest  a 
just  appreciation  of  personal  rights.  Holding,  then,  this  con- 
ception firmly  in  mind,  is  it  not  illogical  to  say  that  a  "  co- 
operative organization  of  property  owners  "  can  ever  rise  to 
the  dignity  of  a  city  government  ?  The  rights  and  duties  in 
a  co-operative  organization  rest  upon  contract  between  the 
several  members,  whereas  the  rights  and  duties  of  a  city  come 
from  a  sovereign  state  and  find  expression  in  a  charter.  It 
is  inaccurate  to  say  that  a  mayor  can,  under  any  circum- 
stances, become  "  a  mere  instrument  to  make  and  enforce  a 


MUNICIPAL  INDEBTEDNESS.  363 

contract  between  property  owners."  Such  a  statement  con- 
tradicts the  legal  conception  of  a  contract,  which  demands 
that  all  obligations  which  it  records  should  be  willingly  as- 
sumed. Evidence  of  undue  influence  will  defeat  a  contract ; 
and  certainly  comphance  with  the  wishes  of  a  majority  under 
threat  of  legal  penalty  can  not  be  cited  as  holding  even  the 
remotest  analogy  to  a  contract.  The  tnith  of  the  case  pre- 
sented in  the  argument  from  which  we  have  quoted  is,  that 
the  mayor  administered  a  law  for  the  taxing  of  property 
owners,  which  law  was  enacted  by  the  legislative  body  of  the 
city,  which  body  was  authorized  to  legislate  by  the  estab- 
lished powers  of  the  State,  which  State  derived  its  powers  to 
grant  such  authority  from  the  sovereign  people.  This  act  of 
the  mayor,  therefore,  as  every  act  of  a  public  official,  is 
rooted  in  the  source  of  all  public  authority,  the  assent  of  the 
people.  Nineteen  property  owners  can  not  unite  and  coerce 
a  twentieth  property  owner,  but  they  can  secure  in  their 
favor  the  exercise  of  the  coercive  power  of  government,  by 
the  adoption  of  well-known  legal  methods.  The  truth  is, 
that  a  city  constitutes  an  organic  part  of  the  general  state, 
and  can  not  be  torn  from  the  framework  in  which  it  is 
imbedded,  nor  is  it  possible  to  separate  the  duties  assigned 
to  it  into  governmental  and  private,  since  they  are  all  govern- 
mental, resting  as  they  all  do  upon  the  sovereign  power  of 
coercion.  To  hold  the  contrary  view  involves  one  in  the 
error  of  endeavoring  to  define  a  state  according  to  the  func- 
tions performed,  an  endeavor  which  both  history  and  analysis 
declare  to  be  impossible. 

I  can  not  think  this  argument,  resting  upon  the  assump- 
tion that  a  city  is  an  association  of  property  owners,  presents 
the  considerations  in  favor  of  restricted  suffrage  in  their 
strongest  light.  It  is  weak  because  built  upon  an  erroneous 
premise,  and  in  this  country  it  mnst  be  ineffective  because 
addressed  to  the  prejudices  of  a  class.  The  more  candid,  as 
well  as  the  more  consistent  argument,  proceeds  from  an 
analysis  of  the  nature  of  all  rights  and  privileges  expressed 
in  law.     Such  rights,  whether  political  or  proprietary,  are 


364  LOCAL  DEFICIT  FINANCIERING, 

grants  from  society  to  individuals,  made  because  it  is  be- 
lieved tlie  higbest  good  of  society  and  of  individuals  will  be 
tbereby  promoted.  This  is  tbe  industrial  defense  of  private 
property  as  against  communal  or  national  property,  and  it  is 
the  only  logical  ground  for  restricting  control  over  public 
affairs.  Could  it  be  shown  that,  in  the  long  run,  there  is 
greater  likelihood  that  virtue,  and  honesty,  and  a  proper  care 
for  tbe  moral  claims  and  general  interests  of  all  sorts  and 
conditions  of  men,  would  reside  with  the  property-holding 
class  than  with  society  itself,  a  clear  and  conclusive  argu- 
ment might  be  presented  in  favor  of  restricted  suffrage. 
But  neither  history  nor  reason  permits  one  to  believe  in  the 
beneficent  workings  of  class  legislation.  Democracy  is  not 
maintained  because  it  is  an  ideally  perfect  form  of  govern- 
ment, but  because  the  chances  are  in  favor  of  the  exercise  of 
wisdom  and  justice  if  all  men  are  secured  the  privilege  of 
expressing  their  opinions.  The  evils  that  grow  up  in  society 
will  more  quickly  come  to  a  head,  and  the  process  of  healing 
will  be  more  quickly  accomplished.  Could  it  then  be  ad- 
mitted that  the  immediate  effect  of  restricted  suffrage  would 
restore  honesty  to  the  management  of  city  treasuries,  the 
argument  even  then  would  not  be  conclusive,  for  the  ulti- 
mate consequences  of  such  a  measure  must  also  be  taken  into 
the  account. 

But  can  it  be  admitted  that  the  immediate  effects  of 
property  representation  would  elevate  the  moral  tone  of  city 
politics  ?  The  reply  of  the  Pennsylvania  commission,  to 
which  we  have  made  reference,  is  pertinent  to  this  question, 
for  it  shows  that  any  limitation  of  political  privileges,  by 
which  the  control  of  city  affairs  would  be  thrown  into  the 
hands  of  responsible  property  holders,  must  proceed  so  far 
as  to  exclude  many  honest  and  responsible  members  of  so- 
ciety. 

The  provision  recommended  by  the  New  York  commission 
[says  this  report],  requiring  the  payment  of  an  annual  rental 
of  $250  as  a  qualification  for  voting,  would,  in  our  State,  ex- 
clude [a]  very  large  and  reputable  class  of  citizens,  while  it 


MUNICIPAL  INDEBTEDNESS.  365 

would  not  exclude  the  tenants  of  low  grog-shops  and  other 
disreputable  establishments,  who,  in  most  cases,  pay  a  higher 
rent.  While  it  would,  no  doubt,  exclude  some  of  the  irre- 
sponsible class,  it  would  also  exclude  very  many  of  the  sons  of 
reputable  property  holders,  who  would  exercise  the  right  of 
franchise  honestly  and  intelligently. 

An  additional  argument  of  a  practical  nature  is  urged 
against  the  plan  of  restricted  municipal  suffrage  by  the 
Pennsylvania  commission.  Some  share  of  the  debts  is 
charged  to  the  interference  of  the  Assembly  in  local 
affairs. 

Again,  it  is  but  fair  to  say  [says  this  report]  that  in  many 
cases  the  largest  debts  have  been  contracted,  not  by  the  author- 
ity of  councils,  or  any  department  of  the  city  government  proper, 
but  under  the  provisions  of  special  acts  of  the  Assembly,  ap- 
pointing commissioners  to  open  streets,  park  commissioners, 
building  commissions,  bridge  commissions,  etc.,  passed  not  only 
without  the  request  of  councils,  but  very  often  against  their 
earnest  pi-otest.  For  these,  and  many  other  reasons  which 
might  be  given,  the  commission  are  not  prepared  to  recom- 
mend a  property  or  rental  qualification  for  voting  as  an  ade- 
quate protection  against  municipal  debt. 

I  do  not  expect  that  what  has  been  said  will  be  accepted 
as  conclusive  against  the  proposal  of  restricted  suffrage.  With 
regard  to  the  impossibility  of  curtailing  suffrage,  it  will  be 
replied  that  this  end  may  be  attained  by  means  of  successive 
political  combinations.  The  Irish  may  be  worked  against 
the  negroes ;  the  Germans  may  be  combined  against  the 
Irish ;  the  Americans  can  unite  and  oust  the  Germans ;  and 
then  the  "respectable  property  owners,"  will  have  it  all  their 
own  way.  This  does  not  seem  to  me  to  be  as  practical  a 
proposal  as  the  one  which  relies  upon  the  fact  that  State 
legislatures  are  usually  dominated  by  the  sentiments  of  coun- 
try members.  What  I  have  said  upon  this  subject  is  readily 
recognized  as  suggestive  rather  than  conclusive.  The  ques- 
tion touches  one  of  the  fundamental  problems  in  political 
philosophy.  But  it  is  hoped  that  enough  has  been  said  to 
raise  at  least  a  suspicion  in  the  minds  of  my  readers  that  the 
remedy  proposed  is  inadequate  because  it  is  based  upon  a 


366  LOCAL  DEFICIT  FINAXCIEEING. 

superficial  analysis  of  social  relations.  I  shall  undertake  in 
tlie  following  chapter  to  trace  the  evil  complained  of  to  its 
true  source,  and  to  make  good  the  claim  with  which  this  dis- 
cussion began,  that  municipal  corruption  is  largely  due  to 
the  imperfect  development  of  administrative  methods  under 
democratic  rule. 


CHAPTEPw  IV. 

POLICY    OF    EESTEICTIXG    GOVEEX^^IENTAL    DUTIES. 

It  is  frequently  easier  to  ciiticise  a  proposed  treatment  of 
an  evil  tiian  to  suggest  one  more  fitting  to  the  necessities  of 
the  case,  and  in  speaking  further  of  that  portion  of  munici- 
pal indebtedness  which  springs  from  corrupt  practices,  I  am 
especially  sensible  of  the  embarrassment  thus  occasioned. 
Not  only  is  the  subject  itseK  full  of  diflBculties,  but  my  in- 
vestigations have  led  me  to  entertain  views  respecting  it  not 
in  complete  harmony  with  the  prevailing  opinions  of  the 
day.  This,  however,  can  not  be  urged  as  a  reason  for  with- 
holding an  expression  of  such  views  as  are  entertained. 

True  Source  of  Mun  icipal  Corruption. 

The  fij^  step  toward  understanding  this  subject  is  to  rec- 
ognize that  municipal  corruption  is  merely  a  symptom  of 
deep-seated  disorder  in  the  body  politic,  and  not  a  distinct 
and  independent  eviL  "Whatever  the  restrictions  placed 
upon  the  power  to  borrow  money,  or  whatever  the  estab- 
lished rules  of  suffrage,  the  record  of  municipal  affairs  during 
the  past  twenty-five  years  would,  in  all  probability,  have 
presented  many  instances  of  corrupt  administration.  "We 
can  not  rest  satisfied  with  a  superficial  analysis  of  this  im- 
portant subject.  My  own  opinion  may  be  stated  in  a  sen- 
tence. The  final  explanation  of  mtmicipal  corruption  is 
found  in  the  fact  that  the  present  organization  of  society 
does  not  properly  correlate  public  and  private  activity.  The 
mistake  which  the  people  of  the  United  States  have  been 


368  LOCAL  DEFICIT  FINANCIERING. 

making  since  1840,  lies  in  supposing  that  the  business  of 
government  may  be  honestly  carried  on  while  strict  justice 
and  common  honesty  are  not  demanded  by  prevalent  busi- 
ness sentiment ;  and  that  efficiency  may  be  secured  in  public 
affairs  while  the  offer  of  greater  inducements  draws  efficient 
men  toward  private  walks  of  life.  Assuming  this  to  be  true, 
it  follows  that  the  problem  of  municipal  reform  is  but  a 
minor  part  of  the  problem  of  social  organization,  and  that 
the  true  principle  of  reform  consists  in  a  redistribution  of 
motives  that  induce  personal  conduct.  Let  us  look  into 
this  matter  a  little  more  closely. 

The  life  of  all  men  is  embraced  in  what  we  call  society. 
This  society  is  organic  in  its  development,  and  confines 
within  itself  all  individual  growth  and  action.  The  activity 
which  it  displays  is  either  public  or  private — that  is  to  say, 
the  activity  of  the  state,  embracing  all  governmental  func- 
tions, and  that  of  persons  or  corporations  undertaken  for 
private  ends.  But  a  government  does  not  differ  from  a  pri- 
vate corporation  in  the  nature  of  the  functions  which  may 
be  imposed  upon  it ;  the  essential  difference  lies  in  the  fact 
that  the  services  which  it  renders  and  the  duties  which  it 
performs  rest  upon  the  direct  exercise  of  coercive  power. 
The  line  separating  public  from  private  duties  is  clearly  de- 
fined so  far  as  the  principles  are  concerned  to  which  each 
must  conform,  but  it  is  ever  changing  for  particular  ser- 
vices. Each  department  of  social  activity  exerts  a  decided 
influence  upon  the  other,  and  failure  to  attain  the  best  re- 
sults in  the  one  must  affect  injuriously  the  actions  of  the 
other.  The  important  question,  therefore,  is  :  Under  what 
adjustment  may  the  best  results  be  expected  from  both  lines 
of  activity? 

The  relation  here  suggested  will  be  more  clearly  appre- 
hended if  we  notice  the  difference  between  the  principles 
which  control  a  public  and  a  private  business.  A  private 
business  is  managed  to  secure  profit ;  and,  other  things  being 
equal,  the  higher  the  price  obtained  for  any  service  rendered, 
the  higher  will  be  the  profit  secured.     The  rule  of  private 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.       369 

financiering  is  to  maintain  the  price  of  goods  or  services  at 
tlie  highest  figure  which  has  no  tendency  to  curtail  profitable 
business.  But  the  rule  of  public  financiering  conforms  to 
an  altogether  different  principle.  It  is  the  aim  of  govern- 
ment to  render  its  services  at  the  lowest  possible  cost  con- 
sistent with  efficient  service.  Price  equals  cost.  This  must 
be  the  case,  for  a  state  has  no  motive  in  acquiring  riches. 
The  officers  of  the  state  are  in  receipt  of  salaries,  which, 
speaking  roughly,  may  be  said  to  correspond  to  the  profit 
secured  by  the  managers  of  private  business. 

But,  although  the  rules  involved  in  the  two  methods  of 
doing  business  are  thus  opposed  to  each  other,  the  one  de- 
manding the  highest  and  the  other  the  lowest  price  possible, 
it  is  generally  assumed  that,  in  the  conditions  in  which  they 
are  respectively  applied,  they  will  effect  parallel  results ;  and 
the  object  to  be  held  in  view,  in  the  formation  of  both  the 
political  and  the  industrial  constitution,  is  so  to  arrange  the 
social  order  that  these  results  will  be  parallel.  The  functions 
of  government  are  usually  carried  on  as  a  strict  monopoly, 
and  the  machinery  of  audits  and  public  accounts  is  found 
necessary  to  insure  fairness  between  the  public  official  and 
the  subjects  whom  he  serves.  Any  deviation  from  fairness, 
in  taking  more  for  his  service  than  his  salary,  is  called  cor- 
ruption. In  private  economy,  on  the  other  hand,  a  legally 
established  monopoly  is  contrary  to  every  conception  of 
right  and  justice.  For  why  should  the  law  give  to  individu- 
als full  control  over  any  business  when  those  individuals  are 
irresponsible  to  the  law  for  the  manner  in  which  they  con- 
duct it  ?  The  only  guarantee  for  fair  treatment,  when  men 
are  striving  to  secure  the  highest  price  possible  for  services 
which  they  render,  lies  in  the  fact  that  freedom  of  competi- 
tion among  producers  tends  to  bring  the  price  of  sale  down 
to  the  cost  of  production. 

Perceiving,  then,  the  difference  that  exists  between  public 
and  private  control  of  business  affairs,  we  may  proceed  to  in- 
quire under  what  conditions  the  best  results  may  be  ex- 
pected from  both   methods  of  organization.     The  reply  to 


370  LOCAL  DEFICIT  FINANCIERIXG. 

this  question  has  been  already  suggested.  The  best  results 
may  be  expected  when  the  duties  assigned  to  public  officials 
and  the  functions  performed  by  private  individuals  are  so 
correlated  that  the  inducements  offered  are  of  about  equal 
strength  in  both  domains  of  activity.  It  is  of  course  neces- 
sary, in  applying  this  rule,  to  take  into  consideration  other 
than  merely  pecuniary  motives  by  which  men  are  led  t{^  act. 
Considerations  of  social  distinction,  the  desire  to  exercise  such 
powers  as  one  may  possess,  the  pleasure  of  tilling  well  a  re- 
sponsible position,  indeed,  all  the  varied  demands  of  human 
nature,  must  be  admitted  into  the  account.  If  the  import- 
ance of  the  state  is  so  emphasized,  and  the  allurements  in  the 
form  of  social  position  or  emoluments  of  office  are  so  strong, 
that  the  best  talent  of  the  people  is  drawn  into  the  public 
service,  a  powerful  and  efficient  government  wiU  probably  be 
established,  but  a  very  poor  society.  It  is  believed  that 
Prussia  is  now  suffering  from  the  dearth  of  talent  and  vigor 
in  common  business  enterprises,  and  that  she  must  continue 
to  suffer  in  this  manner  until  the  state  relaxes  its  hold  upon 
the  brilliant  and  talented  of  her  youth.  A  German  sewino;- 
machine  is  but  a  bungling  affair,  made  after  the  abandoned 
models  of  American  patterns ;  but  German  cities  are,  as  a 
rule,  well  governed. 

In  our  own  country,  on  the  other  hand,  one  observes  that 
society  has  developed  in  the  opposite  direction.  Here  the 
great  prizes  are  in  the  line  of  individual  initiative.  Our 
civil  service  is  so  poor  that  an  officer  has  no  social  position, 
while  a  business  man  who  accumulates  money  is  regarded 
with  deference.  The  salary  paid  by  the  state  is  nothino- 
when  compared  with  what  men  of  ordinary  talent  may  secure 
either  as  profit  if  engaged  in  business  on  their  own  account, 
or  as  wages  of  superintendence  if  working  for  a  private  em- 
ployer. It  is,  therefore,  no  occasion  for  surprise  to  learn 
that  in  this  country  we  have  very  perfect  sewing-machines 
but  poorly  administered  cities. 

It  may  seem  that  this  explanation  of  municipal  corruption 
lacks  in  the  definiteness  of  its  suggestions.     It  can  not  be 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.       371 

placed  as  a  single  plank  in  a  party  platform,  nor  be  urged  in 
a  single  bill  before  a  legislative  body.  It  is,  however,  per- 
tinent, and  should  be  permitted  to  exert  a  marked  influence 
upon  the  decisions  of  those  who  frame  our  general  laws.  It 
does  not  regard  the  question  of  municipal  corruption  as  an 
isolated  question,  but  as  a  phase  of  the  great  social  question 
now  claiming  so  large  a  share  of  pubHc  attention.  It  holds 
that  the  true  line  of  reform  lies  in  such  a  modification  of  the 
relative  strength  of  motives  offered  that  men  of  ability  and 
honesty  will  be  willing  and  desirous  to  take  upon  themselves 
public  responsibilities,  for  it  believes  that  this  must  result 
in  changing  somewhat  the  spirit  that  now  controls  society. 

One  can  not  fully  appreciate  this  view  of  the  case  with- 
out calling  to  mind  the  possibilities  of  acquiring  wealth  in  a 
rapidly  developing  industrial  society.  The  atmosphere  of 
such  a  society  is  intensely  commercial,  and  not  only  do  men 
of  ability  and  energy  refuse  to  consider  a  public  position  as 
desirable  for  themselves,  but  they  regard  with  supercilious 
condescension  one  who  is  willing  to  assume  public  office. 
And  it  may  be  added  in  this  connection,  as  bearing  on  the 
question  of  municipal  corruption,  that  the  moral  judgments 
of  a  public  officer  are  very  much  like  those  of  his  neighbors 
who  elect  him,  and  the  sentiments  that  control  in  the  trans- 
action of  their  daily  business  wiU  probably  give  color  to  his 
administration.  But  the  ordinary  business  life  of  the  nine- 
teenth century  is  such  as  to  render  men  familiar  with,  the 
methods  of  speculation,  and  to  conform  their  ethical  princi- 
ples to  the  requirements  of  the  law  of  supply  and  demand. 
The  spirit  of  speculation  partakes  in  character  of  the  spirit 
of  gambling.  It  judges  of  all  business  undertakings  on  the 
basis  of  their  pecuniary  success,  and  has  little  care  for  the 
equivalents  given  for  what  is  gained.  A  fine  sense  of  what 
is  just  can  not  exist  where  it  prevails,  nor  can  a  delicate 
appreciation  as  to  what  is  honest  be  long  retained  by  busi- 
ness men  who  conform  to  its  demands. 

Suppose,  now,  a  man  of  good  intentions  to  come  into 
public  office  in  a  community  breathing  the  atmosphere  of 


372  LOCAL  DEFICIT  FINANCIERING. 

commercial  speculation,  what  does  lie  see  upon  looking  into 
the  society  whose  welfare  is  placed  under  his  guardianship  ? 
He  sees  it  to  be  no  uncommon  thing,  where  freedom  of  con- 
tract is  unrestricted,  and  where  the  principle  of  individual 
ownership  is  indiscriminately  applied  to  all  of  the  agencies 
of  production,  that  fortunes  are  established  in  the  hands  of 
men  and  famihes  having  no  moral  right  to  them.  Men  who 
have  been  lucky  in  owning  real  estate  that  other  men  want ; 
men  whose  mines  happen  to  yield  purer  copper  than  other 
mines  worked ;  men  with  timber-lands,  salt-wells,  and  other 
gratuitous  products  of  nature  that  come  into  demand  as  popu- 
lation increases — all  increase  their  pecuniary  importance  out 
of  proportion  to  their  effectiveness  as  producers  of  wealth. 
He  sees,  also,  that  many  businesses,  which  from  their  very 
nature  must  be  carried  on  as  monopolies,  are  given  over  to 
private  control,  to  which  the  principle  of  private  financiering 
is  applied  with  all  its  vigor,  and  thus  large  fortunes  are  ac- 
cumulated, and  large  power  over  men  acquired,  exceeding 
by  far  the  importance  of  any  individual  to  society.  He  sees 
also  that,  in  many  businesses  which  are  naturally  subject  to 
the  regulating  influences  of  competition,  artificial  combina- 
tions are  established  by  means  of  which  monopoly  prices  are 
secured  from  consumers.  But  such  privileges  as  these  can 
not  pass  unchallenged,  and  it  naturally  follows  that  the  im- 
portant lawyers  of  every  town  are  retained  at  large  salaries 
to  defend  by  their  tempered  talents  the  privileges  that  mo- 
nopolists have  acquired,  while  other  lawyers  are  hired  to 
depart  from  their  legitimate  business,  to  secure  for  business 
men  some  special  legislation.  Yet  all  this  is  within  the  law. 
It  can  not  be  branded  as  corrupt,  although  the  least  sum 
taken  by  an  official  beyond  his  authorized  salary  is  properly 
characterized  as  robbery. 

As  contrasted  with  this  state  of  affairs,  what  does  our 
candidate  see  in  the  office  to  which  he  has  been  elected  ?  He 
will  not  long  remain  an  incumbent  before  discovering  that 
the  position  which  he  sought  as  a  dignity  brings  with  it  no 
honor.     What  he  thought  to  be  a  place  of  responsibility  and 


POLICY   OF   RESTRICTING   GOVERNMENTAL   DUTIES,        373 

power,  proves  to  be  tlie  center  of  no  great  influence,  demand- 
ing in  reality  little  beyond  the  perfunctory  duties  of  a  minis- 
terial officer.  He  finds  that  there  is  small  demand  for  the 
exercise  of  judgment,  and  narrow  play  for  the  development 
of  manly  faculties.  He  also  learns,  through  the  sinister  sug- 
gestions of  those  whose  personal  interests  he  does  not  for- 
ward, that  his  tenure  of  office  is  insecure ;  and,  last  of  all, 
he  finds  that  his  salary  does  not  suffice  to  keep  his  family  in 
a  respectable  condition,  and  that  the  gratitude  of  republics 
does  not  extend  to  provision  for  their  servants  against  sick- 
ness and  old  age.  Repeating  again  the  assumption  that  our 
candidate  is  honest,  at  least  within  the  meaning  of  the  law, 
and  that  he  is  conscious  of  power,  we  are  warranted  in  con- 
cluding that  the  career  of  an  official  will  not  harmonize  with 
his  tastes.  He  will  upon  the  first  opportunity  return  to  pri- 
vate life,  which  presents  larger  scope  for  efficient  activity, 
and  where  the  prizes  to  be  gained  are  much  greater. 

Such  are  the  conditions  of  public  life  in  most  of  the  mu- 
nicipalities of  the  United  States,  and  what  may  be  observed 
as  the  result  is  altogether  what  might  have  been  expected. 
The  incumbents  of  local  office  are  usually  men  of  indifferent 
ability,  and,  if  not  of  actually  depraved,  are  at  least  of  a 
colorless  character.  Among  "city  fathers"  of  this  sort  there 
appears  from  time  to  time  the  shrewd  yet  unscrupulous  man 
who,  for  personal  aggrandizement,  assumes  complete  control 
of  public  affairs.  This  is  the  explanation  of  "lings"  and 
"  jobs,"  and  this  is  the  reason  why  public  plunder  by  means 
of  bonds,  which  has  been  the  favorite  method  for  the  last 
twenty-five  years,  is  but  an  accident  in  the  development  of 
corrupt  practices.  Corruption  was  suggested  by  the  spirit 
of  speculation  that  permeates  all  business  methods,  and  in- 
vited by  the  weakness  of  municipal  control.  Following  the 
line  of  least  resistance,  this  spirit  of  dishonesty  which  per- 
vades commercial  communities  made  its  appearance  in  the 
form  of  dishonest  issues  of  bonds. 

To  proceed  further  in  the  discussion  of  municipal  reform 
would  be  to  go  beyond  the  proper  sphere  of  this  essay ;  still 
25 


374  LOCAL   DEFICIT  FINANCIERING. 

it  may  not  be  inappropriate  to  suggest  one  or  two  measures 
from  which  satisfactory  results  may  be  expected.  It  seems 
essential,  in  tlie  first  place,  that  civil  service  rules  of  the 
strictest  sort  should  be  applied  to  all  cities  and  towns.  For 
all  duties  of  a  perfunctory  sort,  a  tenure  of  office  during  sat- 
isfactory service,  and  a  suitable  pension  at  the  close  of  a  defi- 
nite period  of  service,  should  be  established.  Only  ^der 
such  conditions  can  a  career  be  opened  for  men  who  under- 
take public  duties ;  and  until  a  satisfactory  career  is  provided 
none  but  shiftless  men  will  present  themselves  for  local  office. 
All  that  has  been  said  respecting  civil  service  regulations  for 
the  Federal  government  and  for  the  States,  may  be  repeated 
■with  emphasis  when  applied  to  cities.  I  am  speaking  here 
of  county  sheriffs  and  city  treasurers,  not  of  State  governors 
or  United  States  senators. 

It  seems  also  necessary  that  the  element  of  personal  re- 
sponsibility be  introduced  into  the  administration  of  munici- 
pal affairs.  No  government  can  reasonably  expect  to  be 
well  carried  on  that  divides  the  duties  intrusted  to  it  among  a 
number  of  independent  boards.  The  office  of  mayor,  for 
example,  is  an  office  that  demands  independence  and  force 
of  character  in  the  incumbent,  and  for  this  reason  we  are  led 
to  approve  the  changes  that  have  recently  been  made  with 
respect  to  the  government  of  the  cities  of  Brooklyn  and 
New  York. 

When  to  these  suo;orestions  it  is  added  that  the  functions 
of  a  city  government  should  be  extended  so  as  to  include  the 
rendering  of  direct  services,  as  the  supply  of  water,  light, 
market  facilities,  dockage  and  the  like,  it  is  probable  that 
many  will  withhold  their  consent,  resting  their  opinions 
upon  known  instances  of  corruption  and  inefficiency  that 
have  followed  such  endeavors.  But  without  calling  attention 
to  the  many  instances  of  successful  administration  of  pro- 
ductive property  by  city  governments,  it  may  be  said  that 
the  suggestions  here  urged  follow  necessarily  from  the  fore- 
going explanation  of  the  cause  of  present  municipal  corrup- 
tion.    The  discussion,  therefore,  upon  this  point  must  revert 


POLICY  OF  RESTRICTIXG   GOVERNMENTAL  DUTIES.        375 

to  that  explanation.  The  common  objection  to  tliis  entire 
view  of  the  case  is  that,  after  all,  the  true  reason  why  men  of 
ability  and  honesty  do  not  care  for  public  oflace  lies  in  the 
fact  that  the  constituency  which  they  must  serve  is  degraded 
and  fickle.  There  is  indeed  much  truth  in  this  statement,  but 
so  far  as  true  it  strengthens  the  position  which  this  essay  as- 
sumes ;  for  it  shows  in  a  yet  clearer  manner  the  fact,  already 
brought  to  light,  that  the  question  of  municipal  corruption  is 
but  a  phase  of  the  general  social  question  of  the  day.  The 
pecuHar  form  of  political  corruption  which  we  have  de- 
scribed is  the  flower  and  fruitage  of  our  own  generation,  it 
is  the  natural  result  of  endeavoring  to  manage  a  society  ac- 
cording to  the  dogma  of  laissez-faire.  This  state  of  affairs, 
which  is  the  growth  of  years,  can  not  be  changed  at  once, 
but  the  evils  complained  of  will  certainly  remain  so  long  as 
we  presume  to  think  that  the  best  thing  to  be  done  with  a 
public  officer  is  to  lay  him  on  a  shelf  out  of  the  way  of 
doing  harm.  There  is  a  beneficent  principle  in  monopoly 
which  can  only  be  realized  through  the  agency  of  the  state. 
The  path  of  reform  lies  toward  a  proper  correlation  of  public 
and  private  duties. 

Policy  of  Rest/riding  Governmental  Duties. 

The  foregoing  conclusion  rests  upon  a  principle  of  wide 
acceptance  in  matters  of  internal  administration,  and  we  are 
naturally  led,  in  the  next  place,  to  consider  those  restrictions 
imposed  by  public  law  upon  the  power  of  the  States,  or  of  the 
cities  and  minor  civil  divisions,  to  borrow  money. 

It  is  true  that  a  complete  investigation  of  this  subject  lies 
more  properly  in  the  domain  of  administrative  law ;  but 
since  the  science  of  finance  is  closely  allied  to  the  science  of 
law,  it  may  be  well  to  introduce  the  question  at  this  time,  so 
far,  at  least,  as  is  necessary  to  complete  the  historical  presen- 
tation of  the  development  of  financial  powers  in  the  United 
States. 

The  distribution  of  financial  powers  in  any  country  must 
of  necessity  conform  to  the  rule  by  which  duties  are  assigned 


376  LOCAL  DEFICIT  FINANCIERING. 

to  public  or  to  private  corporations.  At  the  time  the  Fed- 
eral government  was  established  there  was  no  controversy 
between  those  who  urged  a  wide  extension  of  public  func- 
tions and  those  who  advocated  what  has  since  come  to  be 
known  as  "the  restrictive  policy."  There  was  no  occasion 
for  such  a  controversy;  for,  under  the  regime  of  hand  in- 
dustry, and  while  all  enterprises  were  necessarily  local  in 
their  character,  because  of  inadequate  means  of  transportation, 
there  was  nothing  to  suggest  the  necessity  of  governmental 
initiative  in  business  affairs.  Public  attention  was  then 
drawn  to  questions  of  political  rights,  and  to  the  proper  dis- 
tribution of  political  powers  between  the  various  grades  of 
government  established. 

Not  many  years  had  passed,  however,  before  another  set 
of  political  ideas  pressed  for  recognition.  The  introduction 
of  textile  machinery  by  the  Eastern  and  Middle  States  led 
to  the  necessity  of  widened  markets ;  and  this,  in  a  country 
situated  like  the  United  States,  could  mean  nothing  else  than 
the  establishment  of  facilities  for  interstate  commerce.  The 
first  important  steps  toward  this  end  were  taken  about  1818, 
and  by  1830  the  enthusiasm  for  public  works  had  become 
general.  But  even  as  late  as  this  it  was  the  political  ques- 
tion about  which  all  discussion  centered,  for  as  yet  the  lines 
between  public  and  private  initiative  had  not  been  strictly 
drawn.  How  this  line  came  to  be  established,  and  how  the 
disasters  that  attended  the  experiment  of  State  control  over 
public  works  led  the  people  to  declare  that  their  governments 
should  have  nothing  further  to  do  with  highways  of  com- 
merce, has  been  portrayed  in  a  previous  chapter.  The  occa- 
sion of  the  restrictions  placed  upon  the  minor  civil  divisions, 
analogous  in  all  respects  to  that  of  the  States,  has  been  like- 
wise disclosed.  They  too,  after  having  run  a  reckless  course 
of  expenditure  in  favor  of  railroads  and  local  improvements, 
have  been  placed  under  a  similar  restrictive  ban. 

It  seems  then  that  the  general  trend  of  the  industrial  pol- 
icy of  this  country  since  1810,  as  reflected  in  the  laws  of  the 
various  commonwealths,  is  quite  in  harmony  with  the  teach- 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.        377 

ing  of  laissez-faire.  The  functions  of  government  have 
been  decidedly  curtailed,  while  the  powers  of  corporations 
under  private  control  have  been  extended  in  a  corresponding 
degree.  There  is  no  doubt  as  to  the  right  of  the  people  to 
disable  their  officials  in  any  manner  they  may  see  fit ;  it  is, 
however,  an  open  question  if,  in  the  present  instance,  they 
have  wisely  exercised  that  right.  Some  steps  looking  to- 
ward restrictive  legislation  for  private  corporations  have  been 
taken  since  1870,  but  this  fact  can  not  modify  our  general 
conclusion. 

But,  before  discussing  the  propriety  of  such  restrictions, 
it  will  be  well  to  notice  more  in  detail  the  nature  of  those 
financial  and  industrial  limitations  imposed  upon  local  gov- 
ernments. These  are  found  in  the  constitutions  of  the  vari- 
ous States,  in  the  charters  of  the  cities,  and  in  general  laws 
pertaining  to  the  inferior  governments.  It  is  the  purpose  of 
these  limitations  to  guard  the  people  against  the  evils  of  pul> 
lie  indebtedness,  and  this  they  undertake  to  do,  either  by 
limiting  the  amount  of  debt  that  may  be  incurred,  or  by  ex- 
cluding the  legislative  body  from  those  lines  of  entei-prise 
which  demand  large  sums  of  money.  Many  States  have 
resorted  to  both  of  these  methods.  Confining,  for  the  present, 
our  attention  to  the  States,  as  distinct  from  the  minor  civil 
divisions,  a  review  of  the  various  constitutions  discloses  the 
following  facts. 

A.  Those  States  that  place  no  financial  or  industrial  re- 
striction upon  their  legislators  are  New  Hampshire,  Yermont, 
Massachusetts,  Connecticut,  and  Delaware.  By  the  constitu- 
tion of  1868,  the  legislature  of  Arkansas  was  prohibited  from 
borrowing  except  for  "  casual  deficits  "  ;  but  by  the  constitu- 
tion of  1874,  "  treasury  warrants  and  scrip  bearing  interest  " 
are  alone  prohibited,  from  which  it  seems  that  there  is  no  re- 
striction placed  upon  the  issue  of  bonds. 

B.  It  is  the  general  rule  among  the  States  to  place  no 
limitation  upon  the  power  of  contracting  debts  for  purposes 
of  public  defense,  nor  are  such  restrictions  as  exist  to  be  in- 
terpreted as  imposing  any  obstacle  to  refunding  operations. 


378  LOCAL  DEFICIT  FINANCIEIIING. 

Most  of  the  constitutions,  also,  recognize  the  impossibility  of 
adjusting  at  all  times  the  expenditures  of  each  fiscal  year  to 
the  income  of  the  same  year,  and  consequently  provide  for 
temporary  debts  to  cover  deficiencies  ;  but  the  amounts  that 
may  be  borrowed  in  such  cases  are  explicitly  stated.  The 
stipulations  of  public  law  upon  this  point  may  be  seen  from 
the  following  presentation.  ^ 

Temporary  debts  may  be  contracted  as  follows : 

New  York,       not  to  exceed  $1,000,000.  Art.  VII,  sec.  10. 

Pennsylvania,  "  "  1,000,000.  Art.  IX,  sec.  4. 

Kansas,  "  "  1,000,000.  Art.  IX,  sec.  5. 

Ohio,  "  "  '750,000.  Art.  VIII,  sec.  1. 

Kentucky,  "  "  500,000.  Art.  II,  sec.  35. 

California,  "  "  300,000.  Art.  XVI,  sec.  1. 

Maine,  "  "  300,000.  Art.  VI,  Amendment  1848. 

Nevada,  "  "  300,000.  Art.  IX,  sec.  3. 

Missouri,  "  "  250,000.1  Art.  IV,  sec.  44. 

Illinois,  "  "  250,000.  Art.  IV,  sec.  18. 

Minnesota,  "  "  250,000.  Art.  IX,  sec.  5. 

Iowa,  "  "  250,000.  Art.  VII,  sec.  2. 

Texas,  "  "  200,000.  Art.  Ill,  sec.  49. 

Georgia,  "  "  200,000.  Art.  VII,  sec.  3. 

Alabama,  "  "  100,000.  Art.  X,  sec.  3. 

New  Jersey,  "  "  100,000.  Art.  IV,  sec.  6. 

Wisconsin,  "  "  100,000.  Art.  VIII,  sec.  6. 

Nebraska,  "  "  100,000.  Art.  XII,  sec.  1. 

Maryland,  "  "  50,000.  Art.  Ill,  sec.  34. 

Rhode  Island,    "  "  50,000.  Art.  IV,  sec.  13. 

Michigan,  "  "  50,000.  Art.  XIV,  sec.  3. 

Oregon,  "  •'  50,000.  Art.  XI,  sec.  1. 

The  debt  of  Colorado  is  not  to  exceed  one-fourth  of  a 
mill  "  on  each  dollar  of  valuation  of  taxable  property  within 
the  State,"  in  any  one  year,  and  the  total  debt  so  created  can 
not  exceed  three-fourths  of  a  mill  on  taxable  valuation. 
(Art.  XI,  sec.  3.) 

Indiana,  Virginia,  and  "West  Virginia  limit  the  power  of 
borrowing  money  to  "  casual  deficits."     (Compare  for  these 

*  This  is  the  limit  of  debt  that  may  be  contracted  in  one  year ;  it  is  further 
provided  that  the  debt  must  be  paid  within  two  years. 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.        379 

States  respectively,  Art.  X,  sec.  5  ;  Art.  X,  sec.  7 ;  and  Art. 
X,  sec.  4.) 

Louisiana  places  the  limit  of  her  debt  at  the  lowest  point 
below  $25,000,000  which  shall  be  reached  in  the  reduction 
of  her  obligations,  until  the  debt  shall  be  diminished  to  $15,- 
000,000.    (Amendment,  1874,  sec.  2.) 

C.  In  some  cases  the  limit  of  indebtedness,  as  above 
stated,  does  not  mean  an  absolute  limit,  but  that  the  States 
guard  the  exercise  of  the  borrowing  power,  above  the  sums 
specified,  by  some  legally  prescribed  method  of  procedure. 
This  is  the  case  in  New  York,  Illinois,  Iowa,  Kansas,  New 
Jersey,  Rhode  Island,  Colorado,  and  some  other  States.  The 
usual  method  is  to  require  that  the  law  authorizing  such 
loans  shall  be  submitted  to  the  people  for  their  assent.  In 
Arkansas,  a  two-thirds  vote  is  required  to  legalize  such  a  bill. 
In  some  instances,  as  for  example  South  Carolina  (Art.  9, 
sec.  7),  the  passage  of  such  a  bill  through  the  legislature  is 
placed  under  rules  of  procedure  more  than  ordinarily  strict. 

D.  There  are  also  exceptional  limitations.  North  Caro- 
lina can  contract  no  debt  while  existing  debts  are  below  par, 
unless  the  bill  creating  the  debt  contain  a  clause  providing 
for  an  adequate  tax.  "Wisconsin,  Michigan,  Minnesota,  and 
Kansas  are  prohibited  from  contracting  any  debt  for  internal 
improvements.  In  Florida  there  are  specific  grants  for  con- 
tracting debts,  but  by  the  principle  of  exclusive  interpreta- 
tion the  power  to  borrow  money  is  limited  to  these  grants. 
(Art.  XIII,  sec.  7.) 

We  can  not  speak  with  such  definiteness  of  the  restric- 
tions placed  upon  the  minor  civil  divisions.  So  far  as  the 
organic  laws  of  the  States  are  concerned,  it  does  not  appear 
that  the  people  exercise  that  jealous  care  over  the  credit  of 
municipal  corporations  which  they  show  for  the  credit  of 
States  themselves.  In  some  cases,  as  for  example  in  the 
State  of  Ohio,  the  constitution  imposes  the  duty  upon  the 
legislature  to  control  the  exercise  of  the  taxing  and  borrow- 
ing powers  "  so  as  to  prevent  the  abuse  of  such  powers." 
Similar  duties  are  imposed  by  the  constitutions  of  Nevada 


380  LOCAL  DEFICIT  FINANCIERING. 

and  Michigan.  But  provisions  of  this  sort  are  mere  regis- 
ters of  public  opinion.  They  insure  no  action  on  the  part 
of  the  legislatures,  for  they  provide  no  method  of  legal  com- 
pulsion. It  lies  in  the  nature  of  the  relation  existing  be- 
tween the  States  and  minor  civil  divisions  that  the  powers 
of  the  latter  should  be  controlled.  They  are  the  creatures  of 
State  law,  and,  in  the  absence  of  express  stipulations  to  the 
contrary,  their  exercise  of  public  duties  must  conf oriA  to 
whatever  conditions  are  imposed  by  law.  It  seems,  then, 
that  such  a  constitutional  provision  as  that  adopted  by  the 
people  of  Ohio  grants  no  new  power  to  the  legislative  body, 
nor  does  it  necessarily  act  as  a  restriction  upon  the  expan- 
sion of  local  credit.  So  far  as  the  minor  civil  divisions 
are  limited  in  the  use  of  their  credit  by  the  right  of  con- 
trol inherent  in  the  State,  the  limitation  is  universal.  Its 
mention  in  a  constitution  shows  only  that  the  people  re- 
gard the  exercise  of  this  power  by  the  legislature  to  be  im- 
portant. 

But  it  is  possible  for  the  organic  laws  of  the  States  to 
place  effective  restrictions  upon  the  power  of  municipal  cor- 
porations to  contract  debts,  and  that  in  two  ways  :  First,  the 
power  to  tax  for  the  support  of  the  interest  of  the  debt  may 
be  limited  to  a  definite  percentage  of  assessed  property. 
This  method  is  employed  in  Alabama,  Texas,  Arkansas,  Mis- 
souri, and  Colorado.  In  some  of  these  States  the  limit  of 
taxation  is  a  fixed  limit,  in  others  it  varies  with  the  amount 
of  assessed  property,  decreasing  as  the  wealth  of  the  coun- 
ties or  cities  increases.  In  the  second  place,  the  debts  them- 
selves may  be  limited  to  a  specific  sum  or  to  a  certain  per- 
centage of  assessed  property.  The  States  employing  this 
principle  are  West  Virginia,  Illinois,  Wisconsin,  and  Minne- 
sota, in  which  States  the  limit  is  placed  at  5  per  cent  of  as- 
sessed property.  Pennsylvania  restricts  local  credit  to  7  per 
cent  of  assessed  property,  but  for  debts  beyond  2  per  cent  a 
popular  vote  is  required  to  legalize  the  bill.  Indiana  limits 
to  2  per  cent  except  on  petition  of  a  majority  of  the  prop- 
erty owners  "  in  number  and  value."     Colorado  adopts  the 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.       381 

same  principle,  and  Oregon  prohibits  a  county  debt  beyond 
$5,000. 

Other  States  rely  upon  an  altogether  different  principle 
for  the  control  of  local  financiering.  Without  limiting  the 
amount  of  debt  that  may  be  created,  it  is  provided  that  some 
special  safeguards  shall  be  thrown  about  the  passing  of  laws 
or  ordinances  affecting  public  credit.  In  North  Carolina  a 
majority  of  qualified  voters  must  assent  to  bills  creating 
debt ;  in  Tennessee  a  three-fourths  vote  is  required,  and  in 
California  a  two-thirds  vote  for  all  but  deficiency  bills.  These 
statements,  while  far  from  presenting  the  subject  in  its  com- 
pleteness, are  sufficient  to  show  upon  what  principles  reliance 
is  placed  for  maintaining  the  debts  of  the  minor  civil  divis- 
ions at  a  reasonable  figure. 

Perhaps  the  most  effective  method  of  providing  against 
the  evils  of  public  indebtedness,  when  considered  in  connec- 
tion with  the  history  of  railroad  development  in  this  country, 
is  found  in  the  almost  universal  provision  against  lending 
either  State  or  local  credit  to  private  corporations.  For  pre- 
senting the  facts  of  existing  law  upon  this  point,  we  may 
avail  ourselves  of  the  admirable  table  contained  in  the  tenth 
census  report. 


Notes  to  Table. 

"■  Refers  to  towns  only.  ^  Unless  expressly  assented  to  by  the  people.. 
*  Counties  only.  ^  Unless  bill  authorizing  be  read  three  times.  «  Except  by 
vote  of  majority  of  voters.  ^  Unless  authorized  by  a  two-thirds  vote  at  a  gen- 
eral election,  s  It  is  made  the  duty  of  the  legislature  to  restrict  the  powers. 
^  Unless  two-thirds  of  the  voters  assent.  '  Unless  three-fourths  of  the  voters 
assent,  i  Refers  to  counties  only,  and  they  may  become  stockholders,  but  can 
not  borrow  money  or  incur  debt  therefor.  ^  Refers  to  banking  corporations 
only.  '  Indebtedness  for  aiding  construction  of  railroads  can  not  exceed  5  per 
cent  of  taxable  property.  "  State  can  not  undertake  internal  improvements  nor 
become  stockholder  in  banking  institutions.  "  Can  not  make  donation  without 
vote  of  the  people.  "  The  restraining  provision  is  under  separate  sections, 
superscribed  "  Municipal  subscriptions  to  railroads,"  etc.  P  Can  not  engage  in 
works  of  internal  improvements.  ^  State  can  not  assume  debts  of  minor  civil 
division,  unless  incurred  for  war  purposes.  '  Refers  to  railroad  corporations 
only.  '  Except  for  educational  and  charitable  purposes.  *  Railroad  corpora- 
tions excepted. 


382 


LOCAL  DEFICIT  FINANCIERING. 


Table  showing  constitutional  provision  relating  to  State  and 
local  debts. 


The  credit  of  the  State  can 
not  be  loaned,  or  aid  giv- 
en to  corporations,  etc. 

The  State  can  not  become  a 
stockholder  in  any  corpora- 
tion, etc. 

STATES. 

Ck>nstitatioD. 

Constitution. 

Tear. 

Article. 

Section. 

Year. 

Article. 

Section, 

New  England  States. 
Maine 

1848 

VI 

'iv 

VIII 
IV 
IX 

in 

X 

X 

II 

XVI 
VII 
XIII 
IV 
XII 
LVI 

m 

if" 
II 

vm 

IV 
XI 
XIV 
VIII 
VII 
IX 
IV 

XII 
XI 

VIII 
XI 

XII 

i>'l3 

10 
6 
6 

"'34 

12 
6 

de  14 

f  ^  _ 

5 

7 

54 

5 

*  '50 

*  *33 
31 

4 

20 

12 

6 

3 

1 

10 

45 

3 

1 

»  9 

^8 

13 

1873 

1870 

1872 

1877 
1875 
1875 
1868 
1879 

1851 

1851 
1850 
1848 
1857 
1857 

1859- 

1876 
1864 
1857 
1879 

ix 

X 
X 

VII 
XIII 
IV 
XII 
LVI 

VIII 

Xl" 
XIV 
VIII 
VIII 

IS 

xiii 

XI 

"xV 

VIII 
XI 
XII 

1 

New  Hampshire 

Vermont 

Massachusetts 

.... 

Rhode  Island 

Connecticut 

1842 

.... 

Middle  States. 
New  York 

1874 
1844 
1873 

New  Jersey. 

Pennsylvania 

6 

Delaware 

Maryland 

1867 

1870 
1872 
1876 
1873 
1877 
1875 
1875 
1868 
1879 
1876 

1850 
1870 

1851 
1870 
1851 
1850 
1848 
1857 
1860 
1875 

Southern  States. 
Virerinia 

14 

West  Virginia 

6 

North  Carolina 

South  Carolina 

Georgia 

5 

7 

Alabama 

54 

Mississippi 

5 

Louisiana 

Texas 

Arkansas 

Kentucky 

Tennessee 

"Western  States. 
Ohio 

4 

Illinois 

Indiana 

Michigan 

12 

8 

p   IQ 

Wisconsin 

Iowa 

3 

Minnesota 

P5 

Missouri 

Kansas 

•»  5 

Nebraska 

1875 
1876 
1864 
1857 
1879 

8 

Colorado 

2 

Nevada 

B  9 

Oregon  

g 

California 

13 

POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.       383 


Table  showing  constitutional  provision  relating  to  State  and 
local  debts — {continued). 


Minor   civil   divisions   can  not 
loan  their   credit   or    grant 
aid. 

Minor  civil  divisions  can  not 
become  stocli holders,  etc. 

Constitation. 

Constitution. 

Year. 

Article. 

Section. 

Tear. 

Article. 

Section. 

New  England  States. 

Maine 

New  Hampshire 

1877 

1877 

1874 
1875 
1873 

1867 

1876  j 

1868 
1877 
1875 
1875 
1868 
1879 
1876 
1874 

1870 

1851 
1870 

1850 

1875 

1875 

1876 
1864 
1857 
1879 

ii" 
'XxV 

VIII 

I 

IX 

ill' 
ii' 

VII 

IX 
VII 
XIII 

IV 
XII 
LVI 

III 

XII 

'ii' 
vni 

0 

xv 

'iv 
xii 

XI 

VIII 

XI 

IV 

«  5 

11 
Par.  19 

7 

«  54 

n 

%  9 
6 

7 

55 

hi4 

'"52 
5 

*i'29 
6 

Vis 

.... 
'. .' . 

"47 

"^  2 

1 

MO 

9 

31 

1877 

1877 

1874 

1875 
1873 

1867 

1877 
1875 
1875 
1868 
1879 
1876 
1874 

1870 

1851 
1870 
1851 

1857 
1879 

1875 

1875 
1876 
1864 
1857 

'ii' 

'XXV 
VIII 

I 

IX 

ni" 
vii 

XIII 
IV 
XII 
LVI 

III 

XII 

"li' 

VIII 

0 

X 

viii 

IX 
IV 

"xV 

XI 

VIII 

XI 

.... 

Vermont 

Massachusetts 

Rhode  Island 

Connecticut 

Middle  States. 
New  York 

11 

New  Jer.sey 

Par.  19 

Pennsylvania 

7 

Delaware 

Maryland 

«  54 

Southern  States. 
Virginia 

West  Virginia 

North  Carolina 

.... 

South  Carolina 

Georgia 

6 

Florida 

7 

Alabama 

65 

Mississippi 

hl4 

Louisiana 

Texas 

52 

Arkansas 

5 

Kentucky  

Tennessee 

1  29 

Western  States. 
Ohio 

6 

Illinois 

Indiana 

j  6 

Michigan 

Wisconsin 

Iowa 

Minnesota 

>15 

Missouri 

47 

Kansas 

Nebraska 

1 

Colorado 

2 

Nevada 

Oregon 

♦10 
9 

California 

384:  LOCAL  DEFICIT  FINANCIERING. 

In  addition  to  sucli  limitations  upon  financial  powers  as 
have  been  mentioned,  many  States  make  provision  in  their 
organic  laws  for  the  sure  extinction  of  any  debts  that  may 
be  created.  The  most  simple  method  of  attaining  this  end 
is  to  require,  in  the  law  authorizing  the  loan,  the  establish- 
ment of  a  tax  that  can  not  be  repealed  until  the  principal  of 
the  debt  shall  have  been  expunged.  A  provision  of  this 
sort  will  be  found  in  the  constitution  of  Nebraska.  Color&do 
adopts  the  same  requirement,  but  adds  that  the  debts  shall 
be  drawn  redeemable  in  ten  and  payable  in  fifteen  years. 
Other  States  require  a  sinking-fund  by  which  the  debts  may 
be  extinguished  in  a  specific  number  of  years.  ]^ew  Jersey 
admits  of  bonds  that  shall  run  for  thirty-five  years.  Ken- 
tucky limits  any  specific  debt  to  thirty  years.  In  California, 
!N'evada,  Iowa,  Illinois,  and  West  Yirginia,  it  is  required  that 
debts  shall  be  paid  in  twenty  years  from  the  date  of  their 
creation ;  in  New  York  the  time  is  eighteen  years ;  in  Mary- 
land it  is  fifteen  years.  In  Minnesota  all  temporary  debts 
must  be  expunged  in  ten  years,  while  in  Wisconsin  five, 
and  in  Missouri  but  two  years  are  allowed  for  such  obliga- 
tions. Georgia  appropriates  $100,000  to  the  establishment 
of  a  sinking-fund.  Ohio  requires  the  establishment  of  a 
sinking-fund  that  shall  pay  $100,000  of  the  principal  of 
her  debt  each  year.  Florida  demands  a  tax  "  sufficient  to 
pay  the  principal  and  interest  of  the  existing  indebtedness." 
The  constitution  of  Yirginia  demands  merely  the  establish- 
ment of  a  sinking-fund.  There  are  some  other  provisions 
of  this  sorb-  applying  for  the  most  part  to  minor  civil  divis- 
ions, but  from  those  which  are  given  it  appears  that  the  pur- 
pose involved  in  them  all  is  the  same — that  is,  to  make  pro- 
vision for  the  payment  of  the  debt  at  the  time  the  debt  is 
created.  The  wisdom  of  such  a  provision  has  already  been 
discussed  in  a  former  part  of  this  essay.  For  national  finan- 
ciering— that  is,  financiering  in  the  presence  of  exigencies 
that  may  not  be  forecast — provision  for  the  payment  of  a 
debt  at  the  time  of  its  creation  was  found  to  lay  an  unneces- 
sary strain  upon  the  taxing  machinery  of  the  government ; 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.       385 

biit  for  local  financiering  sucli  stipulations  as  the  above  are 
wholly  in  harmony  with  sound  methods. 

Such  in  the  main  are  the  facts  pertaining  to  the  legal 
restrictions  imposed  upon  the  financial  powers  of  local  gov- 
ernments, and  it  becomes  now  our  task  to  consider  the  policy 
which  they  disclose.  We  may,  however,  proceed  with  greater 
clearness  in  this  discussion  if  we  first  reduce  these  facts  to 
some  orderly  statement,  so  as  to  discover  the  principles  that 
underlie  them ;  nor  will  this  be  difficult,  for  a  slight  consid- 
eration shows  that  they  naturally  arrange  themselves  in  three 
distinct  classes,  according  as  the  power,  the  occasion,  or  the 
method  of  incurring  debts  is  brought  into  view. 

1.  The  power  to  incur  debt  may  be  directly  limited  by 
law,  or  indirectly  limited  by  means  of  restrictions  placed  upon 
the  legislature  to  tax  for  support  of  debts. 

2.  The  necessity  of  incurring  debt  may  be  taken  away 
by  withholding  from  the  legislative  body  the  privilege  of 
entering  upon  such  duties  as  call  for  the  expenditure  of  large 
sums  of  money,  either  independently  or  in  connection  with 
private  corporations. 

3.  The  method  for  legalizing  the  creation  of  a  debt  may 
be  more  carefully  guarded  than  is  the  ease  for  ordinary  bills. 
That  is  to  say,  the  law  may  require  that  bills  calling  for  the 
employment  of  public  credit  shall  meet  the  approval  of  vot- 
ers, or  be  assented  to  by  more  than  a  majority  of  the  legisla- 
tive body,  or  pass  the  assembly  in  such  a  manner  as  to  attract 
the  especial  notice  of  members. 

Let  us  consider  these  principles  of  restriction  in  the  re- 
verse order  in  which  they  have  been  presented. 

The  general  purpose  disclosed  by  legal  limitations  of  the 
third  class  meets  with  the  unqualified  approval  of  the  science 
of  finance.  The  danger  which  always  besets  popular  gov- 
ernment in  a  populous  country  arises  from  the  fact  that  the 
people  are  separated  from  those  who  represent  them ;  and 
the  object  of  establishing  strict  rules  for  the  legalization  of 
important  bills  is  to  render  current  legislation  clear,  and  to 
bring  business  home  to  the  people.    In  the  early  part  of  this 


386  LOCAL  DEFICIT  FINANCIERING. 

essay,  when  considering  the  political  tendencies  of  public 
debts,  it  was  said  that  the  custom  of  borrowing  money  worked 
against  the  full  realization  of  popular  government,  because 
legislators  could,  by  use  of  public  credit,  cover  up  their 
tracks  and  commit  the  people  to  enterprises  in  which  they 
have  no  interest.  The  only  safeguard  against  such  an  evil 
is  the  establishment  of  strict  rules  for  fiscal  legislation. ,  So 
far  as  legal  restrictions  of  this  sort  are  concerned,  therefore, 
not  only  may  we  approve  those  that  exist,  but  we  may  rea- 
sonably demand  that  the  principle  involved  shall  be  yet 
further  developed. 

The  restrictions  of  the  second  class,  so  far  as  they  prohibit 
cities,  counties,  and  towns  from  loaning  their  credit  to  pri- 
vate corporations,  must  likewise  meet  with  general  aj^proval. 
The  reasons  against  such  an  employment  of  municipal  credit 
are  the  same  as  those  properly  urged  against  the  levy  of  a 
special  tax  in  favor  of  private  interests,  or  against  the  ex- 
emption of  property  from  taxation  on  condition  that  certain 
industries  will  be  established  in  one  place  rather  than  another. 
Consider,  for  example,  this  last  proposal.  The  choice  of  a 
site  for  the  establishment  of  a  manufactory  is  of  direct  in- 
terest only  to  those  who  deal  in  real  estate.  If  the  new  busi- 
ness bring  with  it  an  increase  in  population,  it  is  true  that 
values  will  increase  and  rentals  rise.  But  beyond  this,  for 
the  State  at  large,  or  for  the  people  who  consume  the  goods 
produced,  it  is  of  no  great  importance  where  the  industry 
is  situated.  Why,  then,  should  this  increased  burden  (for 
the  exemption  of  any  property  from  taxation  increases  the 
amount  that  must  be  paid  by  other  property)  be  thrown  on 
the  community  when  the  benefit  accruing  therefrom  is  not 
enjoyed  by  all?  When,  however,  the  practice  prevails  of 
granting  immunity  from  taxation  to  industries  newly  estab- 
lished, a  corporation  with  money  in  hand  is  in  a  position  to 
play  the  coquette  with  rival  towns,  and  secure  for  itself 
privileges  of  a  special  nature.  In  the  majority  of  cases  these 
privileges  are  a  pure  gratuity,  and  the  industry  is  established 
where  the  managers  had  decided  to  found  it  before  they  ap- 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.        38Y 

proached  the  towns  with  their  alhiring  offers.  The  only 
remedy  for  such  an  evil  as  this  is  the  establishment  of  a  gen- 
eral rule  that  shall  prohibit  all  towns  from  making  arbitrary 
exemptions. 

The  same  line  of  reasoning  applies  when  railroads '  ask 
from  minor  civil  divisions  the  loan  of  their  credit.  We  may 
rest  assured  that  railroad  facilities  will  be  furnished  when 
the  traffic  of  a  territory  offers  adequate  inducements  for  such 
an  investment  of  capital,  and  the  representations  of  the  man- 
agers, that  without  public  assistance  the  roads  will  not  be 
built,  are  in  large  measure  false.  At  least,  if  such  assistance 
is  required,  it  should  be  given  through  the  agency  of  some 
body  that  can  look  after  the  investment  which  the  pubhc 
makes,  and  this  can  not  be  done  by  the  minor  civil  divisions. 
But  so  long  as  it  is  permitted  to  vote  taxes  or  bonds  for  rail- 
road purposes,  the  managers  have  it  in  their  power  to  secure 
for  themselves  a  favorable  exercise  of  popular  suffrage ;  that 
is  to  say,  private  corporations  are  enabled  to  make  use  of  the 
revenue  machinery  of  the  state  for  private  ends.  This  is 
certainly  an  evil,  as  the  existence  of  township  debts  and  the 
corruption  practiced  by  means  of  the  bonds  of  minor  civil 
di\dsions  amply  testify.  A  slower  development  on  a  more 
solid  basis  should  be  guaranteed  by  law. 

But  these  considerations  do  not  apply  with  equal  force 
to  State  governments.  A  State  differs  from  the  minor  civil 
divisions  in  two  particulars.  It  is  supposed,  in  the  first  place, 
to  hold  in  view  the  general  welfare  of  the  entire  community 
over  which  it  extends  its  jurisdiction,  and  to  make  progressive 
and  uniform  development  its  especial  care.  In  the  second 
place,  it  is  from  the  State  government  that  the  corporations 
receive  their  charters,  and  they  must  in  consequence  conform 
to  State  laws  in  the  administration  of  their  affairs.  It  does 
not  then  follow,  as  in  the  case  of  the  minor  civil  divisions, 
that  capital  placed  at  the  disposal  of  corporations  passes  for- 
ever beyond  the  control  of  the  legislative  body  that  rendered 
pecuniary  assistance.  "We  are  dealing  here  with  a  govern- 
ment which,  according  to  the  theory  of  our  constitution,  is 


388  LOCAL  DEFICIT  FLN^ANCIEPJNG. 

supreme  for  all  local  purposes.  Suppose  it  be  true,  as  is  so 
frequently  stated  (and  as  the  history  of  inland  commerce  in 
the  United  States  goes  to  show),  that  private  credit  is  not 
adequate  to  the  harmonious  development  of  internal  re- 
sources, it  is  certainly  the  States  and  not  the  inferior  govern- 
ments created  by  the  States  that  should  take  this  matter  in 
charge.  But,  under  the  present  condition  of  public  law,  jthis 
is  impossible.  The  States  are  shorn  of  their  most  effective 
instrument  of  power,  in  dealing  with  practical  questions  of 
internal  administration,  by  the  fact  that  they  can  not  loan 
their  credit  and  thus  gain  a  business  standing  among  business 
enterprises.  If  such  governmental  assistance  and  control  as 
are  here  intimated  continue  to  be  necessary  in  the  future, 
it  is  the  Federal  government  and  not  the  State  governments 
that  will  undertake  the  task,  and  we  are  thus  brought  back 
to  the  old  question  of  the  proper  distribution  of  political 
powers.  But  the  thoughts  thus  suggested  will  be  brought 
out  more  clearly  in  connection  with  an  analysis  of  the  re- 
maining class  of  financial  restrictions. 

"What  may  be  said  of  those  laws  and  constitutional  pro- 
visions that  deprive  the  States  and  local  governments  of  the 
right  to  borrow  money  ?  Here  again  it  appears  that  there 
is  more  reason  for  imposing  financial  restrictions  upon  the 
minor  civil  divisions  than  upon  the  States  •,  and  perhaps  noth- 
ing can  be  said  against  the  policy,  as  applied  to  the  inferior 
governments,  if  only  the  laws  admit  of  a  sufficiently  wide 
margin.  For  the  sake  of  explicitness  in  our  argument,  let 
us  first  consider  this  policy  as  applied  to  cities.  The  entire 
question  will,  of  course,  turn  upon  the  ideas  entertained  re- 
specting the  projper  functions  of  municipal  government.  If 
men  still  persist  in  maintaining  the  theory  of  individual  suf- 
ficiency, and  hold  to  the  teachings  of  laissez-faire  in  matters 
of  city  administration,  they  will  certainly  regard  any  pro- 
posal that  looks  to  the  extension  of  local  duties  with  distrust. 
But,  as  has  been  shown  in  the  foregoing  pages,  such  a  posi- 
tion can  not  be  maintained  in  the  face  of  industrial  and 
administrative  history  in  the  United  States,  and,  if  the  decay 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.        389 

of  municipal  government  is  to  be  arrested,  another  policy 
must  be  pursued. 

But  our  present  argument  in  favor  of  granting  cities  ex- 
tensive financial  powers  considers  the  question  of  municipal 
government  from  another  point  of  view.  It  is  not  the 
corruption  of  public  officials,  but  the  corruption  of  private 
corporations  imposed  with  duties  of  a  quasi  public  nature, 
that  now  claims  attention.  None  will  deny  to  the  municipal 
government  the  duty  of  extending  its  protection  to  citizens 
against  all  unnecessary  burdens  from  which  citizens  can  not 
protect  themselves ;  it  becomes  therefore  the  duty  of  muni- 
cipal authorities  to  guard  citizens  against  exorbitant  charges 
from  private  parties  intrusted  with  the  performance  of  du- 
ties of  a  public  nature.  Or,  to  put  the  case  plainly,  street 
railways,  gas  companies,  and  water  companies  should  not  be 
permitted  the  liberty  of  fleecing  those  who  are  obliged  to 
have  dealings  with  them.  It  is,  however,  a  well-established 
principle  in  political  science  that  all  duties  assigned  to  any 
department  of  government  should  be  accompanied  with 
powers  adequate  to  their  performance.  The  question,  there- 
fore, as  to  the  wisdom  of  imposing  financial  restrictions  upon 
the  municipalities  reduces  itself  to  this :  Can  citizens  expect 
adequate  protection  against  private  corporations  that  render 
services  of  a  public  nature  if  they  deny  to  the  municipal 
governments  control  over  capital  ? 

The  facts  pertaining  to  municipal  management  of  gas 
and  water  supply  are  by  no  means  uniform  in  the  United 
States.  I  have  had  occasion  to  investigate  somewhat  the 
methods  adopted,  and,  although  this  is  no  place  for  relating 
in  detail  the  facts  discovered,  one  or  two  statements  may  be 
of  interest  as  bearing  upon  the  question  in  hand.  There 
seems  to  be  a  more  marked  inclination  on  the  part  of  cities 
to  assume  direct  control  over  the  business  of  supplying  water 
than  over  that  of  furnishing  light ;  and  in  passing  it  may  be 
said  that  the  administration  of  water  companies  is  the  occa- 
sion of  less  frequent  complaint  than  that  of  gas  companies. 
But  where  private  water-works  are  allowed,  their  franchises 
26 


390  LOCAL  DEFICIT  FINANCIERING. 

are  likely  to  be  drawn  with  greater  care  than  in  the  case  of 
lighting  companies.  One  provision,  by  no  means  infrequent, 
is  that  water  shall  be  supplied  at  rates  no  higher  than  the 
rates  charged  in  other  cities  similarly  situated.  K  one  city 
in  the  midst  of  twenty  others  should  adopt  such  a  provision, 
reserving  to  itself  sufficient  power  to  enforce  the  contract, 
the  agreement  might  be  regarded  as  significant ;  but  when 
each  of  twenty  cities  grants  to  private  companies  the  privilege 
of  establishing  water-works  on  condition  that  rates  charged 
shall  be  average  rates,  it  is  difficult  to  see  what  guarantee  of 
fair  treatment  the  people  find  in  such  a  clause. 

Another  method  by  which  it  is  hoped  to  maintain  con- 
trol over  the  management  of  water  companies  appears  in 
the  right  which  certain  of  the  smaller  towns  have  reserved 
of  purchasing  the  property  of  the  water  company  at  pleas- 
ure. The  administrative  principle  thus  disclosed  is  one  of 
wide  acceptance  in  European  countries.  It  was  adopted  by 
Belgium  and  France  in  making  concessions  for  the  building 
of  railroads.  The  manner  of  its  working  is  quite  simple. 
Assuming  the  government  to  be  in  a  condition  to  carry 
through  a  purchase,  if  the  administration  of  private  compa- 
nies should  not  be  satisfactory,  the  public  has  little  to  fear 
from  private  management.  The  rates  charged  will  probably 
be  equitable,  the  dividends  paid  will  be  but  a  fair  return  upon 
capital  actually  invested,  there  will  be  no  consolidated  stock 
and  no  fictitious  bonds,  and  the  public  may  also  expect  fair 
and  courteous  treatment  from  the  officers  of  the  concern. 
But  it  should  be  held  clearly  in  mind  that  it  is  the  financial 
ability  of  the  government  to  purchase,  and  not  the  legal 
right  to  purchase,  upon  which  the  effectiveness  of  this  guar- 
antee rests.  If  the  directors  of  a  water  company  know  that 
it  is  practically  impossible  for  a  city  to  raise  money  enough 
to  pay  the  appraised  value  of  their  plant,  this  reserved 
right  of  the  city  becomes  a  dead  letter;  the  management 
will  listen  to  neither  the  complaints  of  citizens  nor  the 
suggestions  of  municipal  officials.  From  such  a  line  of  rea- 
soning we  are  led  to  conclude  that  considerable  latitude 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.        391 

should  be  granted  municipal  authorities  in  their  control  over 
capital. 

It  bj  no  means  necessarily  follows  from  the  foregoing 
argument  that  all  cities  should  own  and  control  water-works. 
Our  reasoning  extends  no  further  than  to  declare  this  fact : 
Unless  cities  are  actually  in  a  condition  to  purchase  such 
works,  no  laws  that  may  be  passed  will  find  enforcement 
against  such  corporations.  It  is  not  denied  that  regulative 
laws  are  of  some  importance,  but  it  is  claimed  that  they  are 
no  final  solution  of  the  question  involved.  Corporations  do 
not  greatly  fear  such  laws,  for  law  can  not  compel  the  ob- 
servance of  fair  business  rules.  The  only  practical  leverage 
that  a  local  board  has  in  dealing  with  a  water  company  or  a 
gas  company  is  the  threat  that,  if  its  service  to  the  public 
be  not  open  and  just,  it  will  be  relieved  from  the  privilege 
of  rendering  further  service.  The  business  is  from  its  na- 
ture a  monopoly.  Ko  reliance  can  be  had  on  competition. 
One  gas  company  is  better  than  a  dozen.  But  this  one  com- 
pany should  ever  be  made  to  feel  that  its  relation  to  the 
public  is  that  of  an  agent  to  a  principal ;  and  in  order  that 
the  business  may  be  managed  in  the  interest  of  the  principal 
rather  than  of  the  agent,  the  principal  must  be  in  a  position 
to  discharge  the  agent  at  will.  This,  however,  the  munici- 
pal authorities  can  not  do  unless  they  are  clothed  with  some 
power  that  gives  them  control  over  capital. 

It  remains  only  to  consider  the  limitations  imposed  upon 
the  States.  These  are  of  two  sorts :  by  the  one  the  State  is 
denied  the  right  of  entering  upon  works  of  a  public  nature  ; 
by  the  other  it  is  forbidden  to  incur  debt  beyond  a  specified 
amount.  We  need  not,  however,  subject  these  to  a  separate 
consideration,  for  limitations  of  the  second  sort  include  the 
first. 

That  our  thought  may  not  be  diverted  from  the  main 
question  in  hand,  it  will  be  well  at  this  point  to  insert  a  word 
of  explanation.  It  may  appear  from  our  presentation  of  the 
history  of  local  indebtedness,  and  the  history  of  industrial 
development  with  which  it  is  so  intimately  related,  that  the 


392  LOCAL  DEFICIT  FINANCIERING. 

main  purpose  of  our  argument  was  to  infuse  new  life  into 
the  old  doctrine  of  States  rights.  Frequent  mention  has 
been  made  of  the  encroachment  of  the  Federal  government 
upon  the  States,  as  though  that  were  necessarily  an  evil.  It 
was  not,  however,  intended  to  bring  the  old  controversy 
again  into  prominence,  nor  can  any  appreciative  student  of 
American  history  fail  to  see  that  the  problem  here  suggested 
is  very  different  from  the  one  which  claimed  the  attention 
of  Calhoun  and  Webster.  We  are  here  dealing  with  a  ques- 
tion of  internal  administration,  and  have  nothing  to  do  with 
the  nature  of  political  rights  or  the  maintenance  of  a  theory 
of  sovereignty. 

Yet  I  would  not  leave  the  impression  that  this  question 
of  financial  restrictions  fails  to  bring  into  prominence  con- 
siderations of  a  political  nature,  for  I  believe  it  to  be  at  bot- 
tom nothing  less  than  the  question  of  the  maintenance  of 
republican  institutions  on  American  soil.  A  disregard  of  the 
fundamental  principles  of  republicanism  will  defeat  the  most 
perfectly  written  constitution ;  it  bears,  therefore,  directly  on 
our  subject  to  inquire  what  these  principles  may  be.  They 
are  two.  First :  All  concentration  of  power,  no  matter  by 
whom  exercised,  should  be  held  to  strict  accountability. 
Second :  The  exercise  of  all  responsible  power  should  lie  as 
closely  as  possible  to  the  people  upon  whom  it  is  exercised. 
So  long  as  these  principles  are  maintained,  the  purpose  of 
constitutional  government  is  safe,  and  the  highest  possible 
liberty  for  man  as  a  member  of  society  is  insured ;  but  dis- 
regard them,  and  republican  government  will  prove  a  failure. 

In  view  of  such  a  statement  of  the  case,  the  historical 
sketch  included  in  Part  III  of  this  essay  assumes  a  deep 
significance.  Its  immediate  purpose  was  to  explain  the  shift- 
ing of  indebtedness  between  the  various  grades  of  govern- 
ment, but  its  result  has  been  to  bring  into  clear  light  an  im- 
portant phase  of  social  development.  It  declares  that  both 
of  the  principles  laid  down  as  essential  to  the  maintenance 
of  popular  liberty  have  been  disregarded.  Thus  the  present 
standing  of  private  corporations  before  the  law  contradicts 


POLICY  OF  RESTRICTIXG  GOVERNMENTAL  DUTIES.       393 

the  rule  that  all  concentrated  power  should  be  exercised 
under  strict  accountability.  The  American  people  deceive 
themselves  in  assuming  to  think  their  liberties  endangered 
only  by  the  encroachments  of  government.  The  center  from 
which  power  may  be  exercised  is  of  slight  importance ;  it  is 
the  fact  of  its  irresponsible  exercise  which  may  justly  occa- 
sion apprehension.  The  growth  of  private  corporations  is  a 
step  in  the  development  of  our  social  constitution.  They 
arose  upon  the  ruins  of  the  States  as  centere  of  industrial 
administration,  and  it  is  because  the  States  have  failed  to  re- 
tain a  proper  control  over  them  that  they  now  menace  the 
permanency  of  popular  government.  It  is  true  that  about 
1873  the  right  of  legal  control  was  judicially  affirmed,  but, 
so  far  as  railroads  are  concerned,  the  measures  adopted  by  the 
various  legislatures  served  only  to  disclose  the  impotency  of 
the  States.  These  coi-porations  are  practically  irresponsible 
to  the  people  by  whose  favor  they  exist,  and  whom  they  pre- 
tend to  serve.  Popular  liberty  could  be  menaced  by  no 
greater  danger. 

On  the  other  hand,  the  growing  importance  of  the  Fed- 
eral government  threatens  to  disregard  the  second  rule,  that 
responsible  power  should  lie  as  closely  as  possible  to  those 
upon  whom  it  is  exercised.  I  do  not  know  that  the  exten- 
sion of  Congressional  duties  in  late  years  has  introduced  a 
tendency  unhealthy  in  itself,  for  most  of  the  new  powers  as- 
sumed are  such  as  seem  essential  to  the  maintenance  of  unity 
in  national  interests  or  of  uniformity  in  institutions.  Few 
would  now  deny  that  the  Federal  government  should  con- 
trol banking  and  currency.  It  is  perhaps  more  rational  to 
fear  for  the  future  than  to  deprecate  what  has  already  taken 
place.  The  public  is  alive  to  the  necessity  of  finding  some 
adequate  solution  to  what  is  properly  known  as  the  monopoly 
question,  and  should  it  ever  be  made  clear  that  this  question 
can  not  be  solved  except  by  extending  the  administrative 
function  of  government,  there  is  little  doubt  as  to  the  grade 
of  government  to  which  the  people  will  turn  for  relief.  The 
only  center  of  political  power  now  in  a  position  to  assume 


394  LOCAL  DEFICIT  FINANCIERING. 

such  duties  is  the  Federal  government.  The  financial  disa- 
bilities under  which  the  States  rest  have  placed  them  Jwrs  de 
comhat ;  and,  without  some  radical  modification  of  existing 
relations  between  the  various  centers  of  government,  the  press- 
ure of  coming  events  will  inevitably  lead  to  an  extension  of 
administrative  functions  under  the  direct  control  of  Congress. 
This  will  be  a  disregard  of  the  second  principle  laid  down  as 
essential  to  the  maintenance  of  government  by  the  people ; 
it  will  result  in  the  complete  destruction  of  the  State  govern- 
ments, which  ought  to  be  regarded  as  the  stronghold  of  the 
Federal  as  opposed  to  the  Imperial  idea. 

But  there  is  more  to  this  question  than  the  solution  of  the 
railroad  problem.  It  is  an  historical  rule  of  wide  application, 
that  as  countries  become  more  populous,  and  the  social  and 
industrial  relations  more  complex,  the  functions  of  govern- 
ment must  necessarily  extend  to  continually  new  objects. 
This  rule  holds  good  now  and  in  this  country,  and,  in  con- 
sequence, the  question  of  the  residence  of  new  powers  be- 
comes more  important  year  by  year.  Consider,  as  a  simple 
illustration,  the  increasing  necessity  for  care  of  the  forests. 
The  frequent  recurrence  of  floods ;  the  more  rapid  and 
marked  alternation  of  drought  and  wet;  the  progress  of 
farming  toward  the  exhaustion  of  lands  ;  all  point  clearly  to 
the  fact  that  the  people  of  this  country  must  soon  turn  their 
attention  to  the  culture  of  trees.  But  this  is  a  line  of  enter- 
prise that  individuals  will  not  enter  upon,  because  the  re- 
turns in  dividends  are  too  remote  from  the  first  investment. 
It  is  a  legitimate  sphere  for  the  employment  of  public  credit, 
and  the  only  remaining  question  is :  Shall  the  enterprise  be 
undertaken  by  the  central  government  or  by  the  local  govern- 
ments ?  To  my  mind  there  is  but  one  answer.  The  States 
are  the  proper  center  for  the  exercise  of  this  function,  yet 
they  are  in  no  position  to  perform  this  duty.  They  have 
been  deprived  of  the  facilities  for  undertaking  such  a  meas- 
ure by  an  over-solicitous  people,  frightened  by  one  unfortu- 
nate industrial  venture. 

Such  are  the  considerations  which  lead  me  to  regard  with 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.       395 

solicitude  the  next  step  in  the  development  of  the  industrial 
constitution  of  the  United  States.  If  this  country  continues 
to  drift,  it  will  surely  come  at  last  under  a  government  of 
concentrated  political  and  administrative  duties.  The  danger 
of  the  present  day  lies  in  the  manifest  tendency  to  bring  the 
political  idpa  of  sovereignty  into  industrial  affairs.  This  is 
an  altogether  different  thought  from  that  which  recognizes 
the  necessity  of  bringing  industrial  activity  into  closer  rela- 
tion to  government  agency.  The  former  leads  to  State  so- 
cialism ;  the  latter  contemplates  only  such  a  modification  of 
the  relations  between  State  agency  and  private  activity  that 
the  pm-pose  which  underlies  the  doctrine  of  laissez-faire  may 
be  realized.  New  meaning  must  be  infused  into  the  lan- 
guage of  the  old  democratic  doctrine  of  States  rights,  m  or- 
der to  successfully  combat  the  extension  of  Imperial  ideas. 
The  question  of  importance  pertains  to  the  proper  political 
and  financial  equipment  of  the  States  for  the  solution  of  the 
industrial  problems  forced  upon  them  by  the  growth  of  cor- 
porations.^ 

"W^e  are  in  some  danger,  in  this  extended  discussion,  of 
losing  sight  of  the  manner  in  which  it  was  introduced.  The 
point  in  controversy,  it  will  be  remembered,  pertains  to  the 
wisdom  of  imposing  financial  restrictions  upon  the  States, 
but  this  is  a  question  properly  subordinated  to  other  consid- 
erations. The  social  and  political  tendencies  of  the  present 
seem  to  demand  that  the  commonwealths  should  be  made 
effective  factors  in  dealing  with  current  problems.  These 
problems,  however,  are  essentially  of  an  industrial  character, 
and  it  is  quite  doubtful  if  they  can  be  satisfactorily  solved 
except  the  States  be  granted  the  liberty  of  controlling  indus- 
trial power — that  is,  capital.  This  liberty  they  do  not  now 
enjoy  under  the  financial  limitations  imposed  by  their  con- 
stitutions. 

But  by  what  steps  may  the  States  gain  a  proper  equip- 

'  This  has  nothing  directly  to  do  with  the  "  Labor  Problem."  That  problem 
pertains  to  organization  within  industries,  and  not  to  the  relation  of  industries 
to  society  at  large. 


396  LOCAL  DEFICIT  FINA2sTIERING. 

ment  for  dealing  with  the  problem  of  industrial  monopolies 
now  weighing  so  heavily  upon  society  ?  A  full  answer  to 
this  query  demands  a  book ;  but,  restraining  our  investigation 
to  the  financial  requirements,  we  may  make  quite  a  definite 
answer.  Three  distinct  steps  must  be  taken,  all  of  which 
involve  a  change  in  public  sentiment,  or  a  reversal  of  certain 
decisions  that  have  found  record  in  public  law,  before  the 
commonwealths  will  be  in  a  position  to  think  strongly  and 
act  efiiciently  upon  such  questions  as  forestry  or  control  over 
inland  commerce. 

1.  The  States  must  be  re-empowered  to  borrow  money. 
This  statement  but  re-afiirms  the  conclusions  of  our  foregoing 
argument. 

2.  The  States  must  abandon  their  claim  to  political  sov- 
ereignty in  matters  of  financial  contract.  This  is  necessary 
because  such  claims  are  for  them  the  source  of  financial  weak- 
ness, and  consequently  of  administrative  inability.  A  private 
corporation  with  unincumbered  property  can  secure  money 
at  cheap  rates,  because  the  contract  into  which  it  enters  is 
amenable  to  the  judgment  and  enforcement  of  the  courts; 
but  the  contract  of  a  State,  which  is  sovereign  in  character, 
rests  for  security  upon  the  good-will  of  the  government.  It 
is  this  liberty  of  repudiation  that  depresses  the  credit  of  the 
States  when  they  demand  money  in  any  considerable  amounts. 
It  may  be  objected  that  the  Federal  government  also  is  sov- 
ereign in  matters  of  contract,  and  yet  its  credit  is  high.  This 
is  true,  but  the  sovereignty  of  the  Federal  government  is  dif- 
ferent in  character  and  purpose  from  that  of  the  States.  It 
stands  before  the  world  as  a  nationality.  It  is  intrusted  with 
the  power  to  declare  war  and  to  conclude  peace.  It  lives 
continually  in  the  presence  of  possible  emergencies,  which 
may  demand  immediate  control  over  large  sums  of  money, 
and  for  that  reason  can  not  afford  to  let  its  credit  decline. 
But  the  States  are  not  imposed  with  sovereign  duties  of  the 
highest  order.  The  idea  of  nationality  does  not  now  attach 
to  them.  They  have  the  right  to  appeal  to  the  central  gov- 
ernment   for    protection   against   invasion   or   insurrection. 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.       397 

They  are  not,  therefore,  under  the  political  necessity  of 
maintaining  an  unblemished  credit.  Is  not  this  position 
into  which  American  public  law  has  drifted  absui'd  and 
illogical?  The  States  are  clothed  with  unlimited  financial 
powers  for  purposes  of  war,  yet  never  have  occasion  for 
going  to  war ;  but  they  are  deprived  of  the  right  to  borrow 
money  for  industrial  purposes,  the  only  object  for  which 
they  may  properly  use  their  credit.  And  from  the  above 
comparison  it  is  easy  to  see  why  the  Federal  government 
guards  jealously  its  credit,  while  the  States,  organized  out  of 
identically  the  same  material,  show  great  carelessness  respect- 
ing it.  The  truth  is  that  State  sovereignty,  as  it  is  now 
maintained,  would  act  as  a  dead  weight  upon  the  credit  of 
the  commonwealths  should  they  ever  be  empowered  again  to 
borrow  money. 

But,  assuming  the  States  are  willing  to  abandon  the 
shadow  of  dignity  for  the  substance  of  power,  how  might 
such  a  purpose  be  attained  ?  This  might  be  done,  so  far  as 
law  is  concerned,  by  the  repeal  of  the  eleventh  amendment 
to  the  Federal  Constitution.  That  amendment,  as  will  be 
remembered,  granted  the  States  immunity  from  suit  on  com- 
plaint of  a  private  person.  Its  repeal  would  permit  a  private 
creditor  to  bring  a  State  to  the  bar  of  the  Federal  court. 
But  there  is  no  reason  to  expect  that  such  a  proposal  could 
ever  be  carried  through,  for,  as  the  States  grow  in  number, 
the  difficulty  of  securing  amendments  to  the  Federal  Consti- 
tution continually  increases.  Nor  is  it  necessary  to  intro- 
duce so  radical  a  change  into  our  organic  law.  The  same 
end  might  be  attained  should  each  State,  in  wording  its  con- 
tracts, grant  creditors  right  of  suit  in  its  own  courts  upon 
protested  bonds.  It  is  one  of  the  curious  ideas  of  the  Ameri- 
can people  that  it  lies  beneath  the  dignity  of  a  political  sov- 
ereignty to  admit  of  suit  by  a  private  person.  Prussia  knows 
no  such  dignity,  but  comes  into  court  as  defendant  on  occa- 
sion of  the  most  trivial  claims ;  and,  should  such  a  practice 
ever  become  common  on  the  part  of  the  States,  there  is  no 
reason  why  local  credit  might  not  equal  that  of  the  Federal 


398  LOCAL  DEFICIT  FINANCIERING. 

government.  Indeed,  under  conservative  management  of 
local  affairs,  there  is  reason  to  believe  that  the  common- 
wealths might  borrow  money  on  better  terms  than  the  Fed- 
eral government. 

3.  It  would  be  necessary,  in  addition  to  the  right  of 
bringing  suit,  for  the  States  to  provide  some  sure  means  for 
the  enforcement  of  a  judgment.  I  will  not  undertake  to  dis- 
cuss this  question  of  legal  procedure,  but  it  is  quite  clear  that 
the  principle  upon  which  reliance  must  be  had  is,  that  a 
court  can  enforce  by  mandamus  the  execution  of  a  law 
which,  duly  passed,  has  become  part  of  a  legal  contract. 
This  would  change  the  character  of  a  State  bond  from  that 
of  a  sovereign  contract  to  that  of  a  promise  of  a  minor  civil 
division.^ 

In  bringing  this  discussion  to  a  close,  it  is  only  necessary 
to  repeat  that  the  question  of  restricted  financial  powers,  so 
far  as  it  pertains  to  the  States,  is  more  than  a  question  of 
finance.  In  its  discussion  I  have  endeavored  to  state  clearly 
the  terms  of  the  problem  with  which  the  country  is  now 
called  upon  to  deal,  and  in  that  statement  my  own  views  have 
necessarily  found  expression.  I  regard  the  general  tend- 
ency disclosed  by  the  history  of  industrial  society  since  1840, 
when  viewed  in  its  relation  to  political  development  and 
social  relations,  to  have  been  unfortunate  in  the  exti*eme.  It 
may  have  been  inevitable,  for  each  step  seemed  at  the  time 
to  have  been  natural  and  proper.  But  this  tendency  has  cer- 
tainly proceeded  far  enough.  The  States  ought  not  to  be 
crushed  between  the  expanding  powers  of  the  Federal  gov- 
ernment on  the  one  hand,  and  the  growing  importance  of 
private  corporations  on  the  other ;  and  the  practical  question 
of  to-day  is  how  to  avoid  such  a  catastrophe.  My  view  of 
the  case  may  be  wrong,  but  it  seems  to  me  that  the  State 
governments  should  be  quickly  put  into  such  a  financial  posi- 
tion that  they  may  assume  certain  administrative  duties  which 
the  pressure  of  events  is  forcing  upon  governmental  agency. 

'  Cf.  arUe,  p.  296. 


POLICY  OF  RESTRICTING  GOVERNMENTAL  DUTIES.       399 

The  lessons  of  the  present  chapter  may  be  summarized 
as  follows :  The  problem  of  municipal  government  is  but 
one  phase  of  the  social  problem ;  the  decay  of  municipal  gov- 
ernment can  only  be  arrested  by  a  re-arrangement  of  the 
privileges,  emoluments,  and  powers  offered  in  the  domain  of 
public  and  private  activity,  and  the  reasoning  upon  which 
this  claim  rests  is  of  application  to  the  general  discussion 
pertaining  to  the  efficiency  of  government  of  any  sort.  "With 
regard  to  financial  and  industrial  limitations,  so  characteristic 
of  political  thought  during  the  last  forty  years,  it  seems  that 
the  evils  against  which  they  were  directed  were  real  evils,  but 
that  the  method  of  curing  them  has  brought  great  danger  to 
present  society. '  The  restrictions  known  under  the  generic 
term  of  "  budgetary  legislation,"  whose  purpose  it  is  to  guard 
the  exercise  of  financial  powers,  meets  with  the  full  approval 
of  the  science  of  finance.  The  denial  of  the  right  to  the 
minor  civil  divisions  to  loan  their  credit  to  corporations,  or 
to  become  stockholders  in  any  private  business,  was  likewise 
adjudged  to  be  a  safe  and  sound  policy.  But  for  the  States, 
whether  we  consider  legal  restrictions  upon  the  loan  of  their 
credit  or  upon  the  sale  of  their  credit,  we  are  constrained  to 
withhold  our  approbation  from  the  theory  upon  which  such 
restrictions  rest. 


i:n"dex. 


Adams,  Charles  Francis,  quoted  in  text, 
325. 

Adams,  Henry,  cited,  114,  266,  267. 

Adams,  John  Quincy,  resolutions  of, 
on  repudiation  of  State  debts,  295. 

Aldrich,  Senator,  plan  of,  for  convert- 
ing the  four-per-cents,  2Y7. 

Annuities,  description  of,  149  ;  in  har- 
mony with  the  mercantile  theory, 
151 ;  arguments  against,  151,  152  ; 
established  by  Hamilton  in  1790, 
165;  relation  of,  to  sinking-funds, 
254;  theory  of  debt-payment  by 
means  of,  255,  256  ;  favored  by  Eng- 
lish financiers,  257,  260. 

Armament,  tendency  of,  in  modern 
States,  16 ;  relation  of,  to  public 
debts,  17. 

Army,  disbandment  of,  in  1865,  in  the 
United  States,  189. 

Austria-Hungary,  debt  of,  4 ;  cost  of 
war  with  Prussia  to,  5 ;  increase  in 
expenditures  in,  13. 

Bank- Act  of  1844,  suspension  of,  in 
time  of  panic,  208 ;  effect  of  suspen- 
sion of,  213. 

Bank,  national,  reliance  of  Sir.  Galla- 
tin on,  120. 

Banks,  national,  amount  of  circulation 
of,  in  1865,  185  ;  law  pertaining  to, 
modified  in  1875,  201 ;  embarrass- 
ment experienced  in  maintenance  of, 
274. 

Banks,  State,  difficulty  in  making  use 
of,  for  public  deposits,  120;  circula- 
tion of,  from  1830-'60,  185,  note; 
amount  of  business  done  by,  from 
1830-'37,  328. 

Barry,  Governor,  view  of,  on  internal 
improvements  in  Michigan,  326,  329. 


Baxter,  R.  Dudley,  cited  in  note,  4  ;  plan 
of,  for  paying  Enghsh  debt,  280. 

Bayley,  R.  A.,  cited  in  note,  308,  337. 

Benton,  Thomas,  quoted  in  text,  323. 

BoUes,  Albert,  referred  to,  for  sketch 
of  refunding,  231,  note. 

Bonds,  public,  variety  of,  on  the  Lon- 
don market,  5  ;  amount  of,  which 
represent  productive  property,  20 ; 
difficulty  in  sale  of,  by  Federal  gov- 
ernment in  1814,  119;  description 
of,  149  ;  uniformity  in,  not  desirable, 
100  ;  variety  of,  in  the  United  States 
in  1870,  150;  private  bonds  com- 
pared with,  205  ;  use  made  of,  for 
banking  purposes,  206,  275 ;  terms 
in  the  contract  of,  transmutable,  224 
should  be  exempt  from  taxation,  232 
legal  character  of,  if  Federal,  25  sq. 
legal  character  of,  if  State,  288  sq. 
legal  character  of,  if  municipal,  295 
sq. 

Bourne,  E.  G.,  quoted  in  note,  326. 

Boutwell,  Secretary,  theory  of  resump- 
tion advocated  by,  197,  199  ;  man- 
agement of  refunding  by,  236. 

Brainard,  Judge  J.  G.,  quoted  in  text, 
297. 

Bristow,  Secretary,  theory  of  resump- 
tion advocated  by,  200 ;  manage- 
ment of  refunding  by,  236 ;  refuses 
to  regard  the  sinking-fund  law  of 
1862  as  superseded,  271. 

Budgets,  accurate  estimates  for,  im- 
possible, 78,  79  ;  comparison  of,  for 
1860  and  1882  in  the  United  States, 
80,  81. 

Bullion,  movement  in,  during  civil  war, 
60. 

Butts,  Isaac,  pamphlet  of,  advocating 
repudiation,  cited  in  note,  41. 


402 


INDEX. 


Capital,  movement  in,  when  bonds  are 
sold  at  normal  rates,  62 — at  high 
rates,  66 — at  rates  abnormally  high, 
Vl ;  true  conception  of,  69,  244 ; 
payment  of  debt  no  destruction  of, 
245 ;  payment  of  debt  should  not 
oppose  employment  of,  248, 

Cave,  Mr.,  report  of,  on  Egyptian  debt, 
30. 

Chase,  Secretary,  theory  of,  on  war- 
financiering,  127;  use  of  temporary 
debts  by,  157;  use  of  deposits  on 
call  by,  158;  use  of  limited-option 
debts  by,  162 ;  failure  of,  to  recog- 
nize business  principles,  167,  168. 

Cheeves,  Mr.,  opposition  of,  to  war- 
taxes,  116. 

Circulating  medium,  amount  of,  in 
1865,  185;  contraction  in  amount 
of,  brings  dull  times,  186. 

Competition,  introduction  of,  between 
the  seaboard  cities,  330. 

Constitution,  Federal,  eleventh  amend- 
ment to,  292. 

Constitutional  limitations,  respecting 
internal  improvements  by  States,  96  ; 
respecting  the  use  of  credit  by  States, 
340,  377,  378,  382  ;'  respecting  use 
of  credit  by  minor  civil  divisions, 
379,  383 ;  classification  of,  and  criti- 
cism upon,  385  sq. 

Conversion  of  public  debts,  opposition 
to,  in  France,  43,  218,  219  ;  policy 
of,  opposed  by  discount  bonds,  176  ; 
discussion  respecting  policy  of,  217 
sq. ;  high  credit  essential  to,  220, 
231 ;  English  and  American  methods 
of,  contrasted,  233 ;  cost  of,  to  gov- 
ernment, 236,  237;  Mr.  Perceval's 
plan  for,  in  1808,  257 ;  of  slight  im- 
portance in  local  financiering,  312. 

Cook  &  Co.,  failure  of,  in  1873,  211. 

Cooley,  T.  M.,  quoted  in  text,  287,  297, 
298. 

Corporations,  private,  control  over  pub- 
lic duties  by,  96 ;  rise  of,  in  the 
United  States,  339 ;  popular  govern- 
ment endangered  by,  393. 

Credit,  public,  comparison  of,  with  pri- 
vate credit,  61 ;  should  be  higher 
than  that  of  corporations,  99 ;  rapid 
fall  in,  from  1861  to  1865,  131; 
true  theory  of,  137,  138  ;  depressed 
by  floating  debts,  180;  constitutional 
limitations  respecting  use  of,  377 
sq. ;  restrictions  upon  use  of,  for 
cities  considered,  385,  386,  389,  390 ; 


restrictions  upon  use  of,  for  States 
considered,  387,  391  sq. 
Customs  duties,  receipts  from,  during 
War  of  the  Rebellion,  132. 

Dallas,  Secretary,  financial  policy  of, 
in  1814,  122;  criticises  the  loan 
policy  of  1812,  126;  use  of  tax- 
loans  by,  156. 

Debts,  public,  growth  of,  since  1714, 
4 ;  increase  in,  contemporaneous  with 
increase  of  wealth,  6 ;  conditions 
necessary  to  the  growth  of,  7  sq., 
28,  41  ;  opposes  popular  govern- 
ment, 22  sq. ;  endangers  autonomy 
of  weak  states,  25  sq. ;  invites  in- 
ternational complications,  34  sq. ; 
renders  permanent  class  relations, 
39, 41 ;  conditions  under  which  they 
are  justifiable,  78 ;  diffusion  of, 
among  the  people,  43 ;  holdings  of, 
in  the  United  States,  44  sq. ;  social 
tendencies  of  international,  50 ;  dis- 
tinguished as  a  transaction  in  credit 
or  in  capital,  53 ;  distinction  be- 
tween local  and  sovereign,  100;  may 
be  made  to  serve  some  useful  pur- 
pose, 203  ;  burden  of,  lightened  by 
fall  in  value  of  money,  241 ;  burden 
of,  lightened  by  development  of  in- 
dustry, 242. 

Debts,  State,  in  1842,  301;  in  1880, 
303 ;  purpose  for  which  they  were 
contracted,  305 ;  growth  of,  from 
1820,  318  ;  agitation  for  Federal 
assumption  of,  in  1842,  332  sq.; 
plan  for  Federal  assumption  of,  in 
1842,  335,  336. 

Debts,  municipal,  amount  of,  in  1880, 
24 ;  purpose  for  which  they  were 
contracted,  305;  rise  of,  since  1840, 
343  ;  balance  of,  for  large  and  small 
towns,  345  ;  interest  of  land  specula- 
tors in  creation  of,  353,  354 ;  amount 
of,  created  for  assistance  to  railroads, 
356  ;  relation  of  municipal  corruption 
to,  357,  sq.,  367. 

Debts  of  various  nations.  Cf.  under 
names  of  States. 

Debts  of  various  sorts  : 

Floating  debts,  in  American  cities, 
24 ;  funding  of,  a  transaction  in  cred- 
it, 54 ;  definition  of,  147 ;  argument 
against,  148  ;  should  be  funded  im- 
mediately on  close  of  war,  179,  180 ; 
may  be  used  in  local  financiering, 
311. 


INDEX. 


403 


Foreign  debts,  international  law  re- 
specting, 25  sq. ;  political  tendency 
of,  for  weak  States,  25  ;  advantages 
of,  in  case  of  war,  58,  59. 

Temporary  debts,  when  justifiable, 
18 ;  relation  of,  to  deficit  financier- 
ing, 83,  154;  characterization  of, 
153  sq.;  necessity  for  the  funding 
of,  154;  treasury  notes  the  best 
form  of,  157 ;  bad  use  made  of,  in 
the  United  States,  159. 

Improvement  debts,  when  justifia- 
ble, 78,  95  sq. ;  annuities  in  harmony 
with  the  purpose  of,  164. 

Emergency  debts,  when  justifiable, 
78,  83  sq. 

Funded  debts,  description  of,  147 ; 
should  be  simplified  at  the  close  of  a 
war,  181. 

Perpetual  debts,  description  of,  159 
sq. ;  change  in  Federal  policy  re- 
specting, in  1801,  160;  relation  of 
discount  bonds  to,  175. 

lAmited-option  debts,  adopted  by 
the  United  States  in  1862,  162; 
argument  against,  162,  163. 

Debts  payable  by  installment,  ad- 
vantages of,  163,  164;  argument 
against,  166,  167. 
Debt  payment,  policy  of,  opposed  by 
moneyed  classes,  42 ;  policy  of,  ob- 
structed by  discount  financiering, 
176;  conversion  should  not  obstruct 
the  policy  of,  225 ;  defense  of  policy 
of,  243  sq. ;  concerning  the  rapidity 
of,  247  ;  injurious  taxes  should  not 
be  maintained  for  purpose  of,  248  ; 
rapidity  of,  in  the  United  States, 
249,  268 ;  provision  for,  by  the  Fed- 
eralists, 263,  264;  theory  of  per- 
manent appropriations  for,  268  ;  by 
market  purchases,  276,  277 ;  policy 
of,  especially  important  in  local 
financiering,  310,  313  sq. 
Debt,  Revolutionary,  funded  into  an- 
nuities, 165  ;  not  reduced  during  the 
Federalist  administrations,  266. 
Deficits,  not  a  sure  sign  of  bad  finan- 
ciering, 78  sq. 
Discount  bonds,  policy  of,  167  sq.; 
gold  proceeds  of,  during  civil  war, 
40,  131;  cash  proceeds  of,  in  Eng- 
land, during  Napoleonic  war,  175 ; 
reasons  for  advocacy  of,  by  practical 
financiers,  170,  171  ;  opposed  to 
policy  of  debt  payment,  175 ;  op- 
posed to  policy  of  conversion,  176. 


Distribution  of  Federal  surplus,  amount 
of,  coming  to  Michigan  in  1837,  327; 
relation  of,  to  the  policy  of  assump- 
tion in  1842,  334. 

Egypt,  political  complications  attend- 
ing the  growth  of  debt  of,  29  sq. ; 
international  conference  respecting 
the  finances  of,  34 ;  amount  of  an- 
nual payment  of,  to  foreigners,  51 ; 
the  debt  of,  why  drawn  as  an  annui- 
ty, 164. 

Elliot,  Jonathan,  funding  system  of 
the  United  States  characterized  by, 
262. 

England,  origin  and  growth  of  debt  of, 
9  sq.;  commercial  spirit  in,  under 
William  III,  10;  military  standing 
of,  16  ;  method  of  providing  against 
fiscal  emergencies  in,  85,  93  sq. ;  use 
made  of  discount  bonds  by,  175 ; 
conversion  of  debt  of,  in  1844,  221 ; 
debt  of,  lightened  by  depreciation  of 
gold,  241,  note;  debt  of,  lightened 
by  growth  of  industry,  242 ;  rise  in 
local  debt  of,  347. 

Erie  canal,  success  of,  329,  330. 

Expenditure,  modern  progress  demands 
increase  in,  12;  increase  in  public, 
since  1840,  13  ;  total  public  in  Unit- 
ed States,  14 ;  rise  in,  for  United 
States,  since  1860,  80,  81;  extent 
of,  for  the  civil  war,  109. 

Exports  of  the  United  States,  1861- 
'68,  60. 

Federalist,  origin  of,  as  a  party  name, 
320. 

Fenn's  "  Compendium  of  the  Funds," 
cited  in  note,  5,  30,  32,  33. 

Financiering,  public,  contrasted  with 
private  financiering,  79,  244,  368 ; 
fundamental  principle  of,  107. 

Fisher,  Joseph,  cited  in  note,  10. 

Ford,  Worthington,  referred  to  for 
sketch  of  refunding,  231,  note. 

Foreign  debts.  Cf.  under  Debts  of 
various  sorts. 

Foville,  Alfred  de,  cited  in  note,  348. 

Floating  debts.  Cf.  under  Debts  of 
various  sorts. 

France,  debt  of,  4;  military  standing 
of,  16  ;  financial  tendencies  in,  since 
1870,  18  sq.;  interference  of,  in 
Mexico,  36 ;  distribution  of  debt 
among  citizens  of,  43 ;  cost  of  war 
of  1870  to,  54 ;  payment  of  indem- 


404 


INDEX. 


nity  to  Germany  by,  64 ;  conversion 
of  public  debt  opposed  in,  43,  218, 
219;  burden  of  debt  of,  lightened 
by  growth  of  industries,  243;  rise 
of  local  debt  in,  346. 

Gallatin,  Albert,  loan  policy  of,  for  the 
conduct  of  a  war,  112  sq.;  relies 
upon  the  United  States  bank,  120; 
opposed  to  perpetual  debts,  162 ; 
views  of,  respecting  payment  of 
debt  by  installments,  167;  policy  of 
equalizing  bids  advocated  by,  169; 
opposes  discount  bonds,  176 ;  em- 
barrassment experienced  by,  in  pay- 
ment of  Federal  debt,  225;  views 
of,  on  sinking  funds,  266,  267  ;  plan 
of,  for  internal  improvements,  322. 

Gambetta,  Leon,  opposes  conversion  of 
debt  in  France,  219. 

Gibbons,  J.  S.,  cited  in  note,  150. 

Giffin,  Robert,  cited  in  note,  261,  280. 

Gladstone,  W.  E.,  proposal  of,  to  re- 
duce interest  on  Egyptian  bonds,  34 ; 
financial  management  of  Crimean 
War  by,  94 ;  terminable  annuities 
favored  by,  261. 

Goulburn,  Mr.,  plan  of,  for  converting 
the  English  debt,  221 ;  quoted  in 
text,  as  favoring  conversion  at  par, 
229 ;  England  abandons  sinking 
funds  under  the  direction  of,  259. 

Government,  distinction  between  sov- 
ereign and  corporate  duties  of,  99, 
368;  policy  of  restricting  duties  of, 
375  sq. ;  difference  between  State 
and  municipal,  387 ;  difference  be- 
tween Federal  and  State,  396. 

Government,  Constitutional,  relation 
of,  to  the  funding  system,  8,  22  sq. ; 
perfect  workings  of,  opposed  by  sur- 
plus revenue,  81 — and  by  war-re- 
serves, 87 ;  safeguard  of,  385  ;  two 
fundamental  principles  of,  392  ;  rela- 
tion of  corporations  to,  393. 

Government  of  cities.  New  York  com- 
mission to  devise  a  plan  for,  369  ; 
Pennsylvania  commission  to  devise 
a  plan  for,  344,  364,  365 ;  true  con- 
ception of  the  nature  of,  362,  363 ; 
source  of  corruption  in,  367  nq.  • 
suggestion  for  reform  in,  374;  ques- 
tion of  gas  in,  389,  391 ;  question  of 
water  in,  390. 

Hamilton,  Alexander,  favored  perpet- 
ual debts,  161 ;  error  of,  in  funding 


the  Revolutionary  debt,  165 ;  pro- 
vision of,  for  paying  the  Revolution- 
ary debt,  263,  264. 

Hamilton,  Robert,  cited  in  text,  251, 
252 ;  cited  in  note,  269. 

Hendricks,  Frederick,  cited  as  au- 
thority on  English  annuities,  258, 
260. 

Hock,  Karl  von,  Secretary  Chase  criti- 
cised by,  168. 

Holland,  debt  of,  in  1714,  8. 

Indemnity,  payment  of,  by  France  to 
Germany,  54  sq. 

Imports,  for  the  United  States  from 
1861  to  1868,  60. 

Improvements,  public,  policy  of,  in  the 
United  States,  96 ;  economy  in,  de- 
mands use  of  credit,  97  sy. ;  plan  of 
Gallatin  respecting,  322 ;  result  of 
the  experiment  of  State  control  over, 
339  sq. ;  relation  of  municipal  debts 
to,  355,  356. 

Income-tax,  use  made  of,  in  England, 
93. 

Industries,  relation  of  public  borrow- 
ing  to,  61  sq.;  not  a  simple  concep- 
tion, 69  ;  effect  of  public  borrowing 
upon,  summarized,  76  ;  effect  of  war- 
reserves  upon,  87 ;  may  be  quick- 
ened by  levy  of  taxes,  108 ;  should 
be  readjusted  to  peace  demands  at 
close  of  war,  180 ;  diversion  of  men 
from,  by  civil  war,  192,  note. 

Interest,  effect  upon  industries  of  loans 
contracted  at  normal  rates  of,  62 — 
at  hiffh  rate  of,  66 — at  rates  of,  ab- 
nornially  high,^!  ;  distinguished  from 
profit,  64 ;  payment  of,  not  evaded 
by  legal-tender  notes,  146 ;  rate  of, 
should  be  lower  on  public  than  on 
private  bonds,  204 ;  rate  of,  not 
affected  by  conversion,  219,  220; 
payment  of,  on  public  debt,  may  be 
anticipated,  209,  278. 

Internal  revenue,  proposed  by  Secre- 
tary Chase,  128;  receipts  from,  dur- 
ing civil  war,  132. 

International  borrowing,  political  ten- 
dencies of,  25,  34,  36. 

International  credits,  use  made  of,  in 
Europe,  56. 

Inventions,  effect  of  textile,  in  Eng- 
land, 11 ;  effect  of  state  of  war  upon, 
70,  71. 

Italy,  debt  of,  4  ;  increase  in  expendi- 
tures of,  since  1870,  13. 


INDEX. 


405 


Jackson,  Andrew,  policy  of,  for  restor- 
ing power  to  the  States,  321 ;  policy 
of,  on  internal  improvements,  323  ; 
quoted  in  note,  324. 

Jevons,  W.  Stanley,  money  market  de- 
fined by,  7  ;  cited  in  note,  69,  241. 

Johnson,  W.  Cost,  report  of,  on  as- 
suming Stdte  debts,  in  1842,  cited, 
295,  308,  333,  334,  335,  836,  337, 
338 ;  quoted  in  note,  324. 

Jones,  Acting-Secretary,  financial  policy 
of,  in  1814,  119. 

Land,  amount  of,  granted  to  railroads, 
356,  note. 

Law,  respecting  foreign  debts,  25  sq. ; 
respecting  State  debts,  288  sq. ;  re- 
specting municipal  debts,  296  sq. ; 
American,  respecting  debts,  36 ; 
American  constitutional,  character 
of,  286,  397 ;  of  New  York,  for  en- 
forcing payment  of  State  debts, 
293. 

Legal-tender  notes,  follow  logically 
from  too  great  reliance  on  loans, 
124;  are  forced  loans,  144;  argu- 
ment against  the  use  of,  145  ;  Secre- 
tary Bristow's  plan  for  the  retire- 
ment of,  200,  201 ;  convertible  notes 
distinguished  from,  215. 

Lewis,  Sir  G.  C,  sinking-funds  favored 
by,  260. 

Loans,  public,  psychology  of,  109 ; 
amount  of,  for  war  of  1812,  117; 
amount  of,  provided  for,  in  1861, 
127  ;  gross  receipts  from,  during 
civil  war,  131 ;  service  rendered  by, 
in  time  of  war,  137,  138;  motives 
leading  to  purchase  of,  143  sq. ;  ar- 
gument against  equalization  of  bids 
for,  169. 

"  London  Times,"  calls  America  a 
"swindling  shop,"  319. 

Louisiana,  payment  of  bonds  issued 
for  purchase  of,  308,  note. 

Luxuries,  effect  of  public  borrowing  on 
the  consumption  of,  69. 

Leroy-Beaulieu,  cited  in  note,  4S,  46, 
57,  151 ;  classification  of  debts  by, 
143  ;  explanation  of  permanent  debts 
by,  176 ;  favors  English  rather  than 
American  method  of  conversion,  233  ; 
criticises  American  policy  of  debt- 
payment,  242,  note. 

Le  Tresor  de  la  Rocque,  H.,  quoted  on 
conversion  of  the  French  debt,  218, 
219. 

27 


MacLeod,  Henry  D.,  views  of,  respect- 
ing the  relation  of  government  to 
panics,  216. 

McCulloch,  Secretary,  argument  of,  for 
contracting  the  currency,  184,  185, 
188,  note;  the  theory  of  resumption 
advocated  by,  194,  198;  disregards 
the  sinking-fund  law,  270. 

McCulloch,  J.  R.,  quoted  on  the  finan- 
cial policy  of  the  ancients,  86. 

Mexico,  threatened  invasion  of,  36. 

Michigan,  experience  of,  with  internal 
improvements,  325,  326;  rate  of 
taxation  in,  for  debt,  in  1842,  332  ; 
law  respecting  railroad  bonds  in,  356. 

Mill,  J.  S.,  quoted  in  text,  187;  cited 
in  7iote,  69. 

Money-market,  nature  of  the,  7 ;  devel- 
opment of,  in  England,  9  sq. ;  strict- 
ure on,  caused  by  surplus  financier- 
ing, 82 ;  relation  of  government  to, 
in  time  of  panic,  207. 

Monopolies,  principle  controlling  prices 
in,  369  ;  problem  of,  396. 

Monroe,  James,  view  of,  on  internal 
improvements,  323. 

Monroe-doctrine,  asserted  by  Mr.  Sew- 
ard, 36. 

Morrill,  Secretary,  speech  of,  on  tax- 
bills  of  1864,  130;  management  of 
refunding  by,  236 ;  computation  of 
the  sinking-fund  accoimt  by,  272. 

Municipal  indebtedness.  Cf.  Debts, 
Municipal. 

Nationality,  effect  of  the  spirit  of,  upon 

finances,  15  sq. 
New  England,   practice  of   enforcing 

municipal  bonds  in,  297. 
New  Orleans,  "premium  bond  plan" 

for    refunding    the    debt    of,    229, 

note. 
Northcote,  Sir  Stafford,  quoted  in  text 

on  conversion  of  the  English  debt, 

221,  229. 
Palmerston,   Lord,  circular  letter  of, 

respecting  foreign  debts,  27. 
Panics,   cause   of,  in  1837  and   1857, 

184 ;    governmental    assistance    in 

time  of,  207  sq. 
Paris,  rise  of  debt  of,  346,  347. 
Paraguay,  cost  of  war  of,  with  Chili,  5. 
Patriotism,  financial  importance  of ,  1 1 1 ; 

loans  based  upon,  not  reliable,  143. 
Perceval,  Spencer,  terminable  annuities 

created  by,  in  1808,  257;  argument 

for  annuities  by,  257,  note. 


406 


INDEX. 


Peru,  care  of  guano  mortgaged  to  se- 
cure bonds  of,  28. 

Pitt,  William,  inventor  of  discount 
financiering,  170,  173;  cited  in  text, 
251,  252,  254,  260. 

Population,  increase  of,  in  cities,  349 ; 
financial  consequences  of  increase  of, 
in  cities,  350,  351. 

Porter,  R.  P.,  cited  in  note,  24,  303, 
304,  332. 

Price,  Dr.  Richard,  theory  of,  respect- 
ing sinking-funds,  251,  sq.\  invited 
to  take  charge  of  American  revolu- 
tionary finances,  262. 

Prices,  not  affected  by  foreign  borrow- 
ing, 58  ;  rise  of,  in  the  United  States, 
from  1860  to  1874,  194;  effect  of  a 
return  of  peace  upon,  187;  effect 
of  inflation  upon,  not  uniform  for  all 
goods,  191. 

Profit,  rate  of,  in  the  United  States, 
250. 

Protection,  theory  of,  responsible  for 
pension  acts,  81 ;  payment  of  public 
debt  in  United  States  traceable  to, 
176,  274. 

Prussia,  cost  of  wars  of,  with  Austria 
and  France,  5 ;  increase  in  expendi- 
ture of,  since  1840,  13;  military 
standing  of,  16;  method  of  provid- 
ing against  fiscal  emergencies  in,  85, 
sq. ;  war-reserve  of,  89 ;  cause  of  low 
low  grade  of  industries  in,  370. 

Refunding  act  of  1870,  theory  of,  222  ; 
classes  of  bonds  created  by,  226 ; 
criticisms  upon,  226,  227,  234,  235, 
279 ;  changes  in  the  debt  occasioned 
by,  232;  cost  of  execution  of,  236, 
237. 

Repudiation,  guarantee  against,  in 
modern  states,  9,  1 1 ;  may  lead  to 
diplomatic  negotiations,  25,  sq. ;  no 
cure  for  social  evils,  41 ;  irredeema- 
ble paper  money  an  invitation  to, 
183;  John  Quincy  Adams  on,  295; 
Porter's  article  on,  cited  in  Tvole, 
332. 

Resumption  of  specie  payments,  con- 
traction of  currency  the  first  step 
toward,  186 ;  arguments  for,  at  close 
of  a  war,  187,  189,  191 ;  why  the 
agricultural  interest  stands  opposed 
to,  192,  193  ;  advocated  by  Secretary 
McCuUoch,  184,  185  ;  Secretary  Mc- 
Culloch's  theory  of,  194,  198;  Sec- 
retary Boutwell's   theory  of,   197; 


Secretary  Bristow's  theory  of,  200; 
accumulation  of  specie  not  adequate 
to,  198;  Secretary  McCulloch's  pol- 
icy arrested  in  1868,  199;  law  of 
1875  providing  for,  201. 

Richardson,  Secretary,  assistance  ren- 
dered by,  in  crisis  of  1873,  211,  212 ; 
criticism  upon,  214 ;  management  of 
refunding  by,  236. 

Roscher,  Professor,  cited  in  note,  69, 
348. 

Russia,  debt  of,  4 ;  increase  in  expen- 
ditures of,  since  1840,  13;  miUtary 
standing  of,  16. 

Sargant,  W.  L.,  work  of,  on  sinking- 
funds  cited,  260,  261. 

Savings,  relation  of,  to  public  borrow- 
ings, 63. 

Seward,  W.  H.,  opposes  French  occu- 
pation of  Mexico,  36. 

Sherman,  Secretary,  management  of 
refunding  by,  236  ;  interpretation  of 
sinking-fund  law  by,  273,  note. 

Sinking  -  funds,  amount  appropriated 
to,  by  Secretary  Chase,  128;  theory 
of,  252 ;  error  of,  as  a  means  of 
dobt-paymcnt,  253  ;  abandonment  of, 
in  England,  259 :  creation  of,  by  the 
Federalists,  263,  264;  Gallatm's 
view  of,  266 ;  abandonment  of,  in 
the  United  States,  267 ;  established 
by  Secretary  Chase,  269 ;  appropria- 
tion to,  may  be  expended  in  the  pur- 
chase of  other  property  than  bonds, 
280 ;  appropriate  for  local  financier- 
ing, 309,  sq. 

Socialism,  effect  of,  upon  budgets,  17, 
sq. 

Spain,  debt  of,  4 ;  increase  in  expen- 
diture of,  since  1840,  13. 

Specie  payments,  suspension  of,  in 
1814,  120;  for  resumption  of,  see 
Resumption. 

Sterne,  Simon,  views  of,  respecting  city 
government,  350,  361. 

Stewart,  Sir  James,  quoted  in  Congress 
in  1813,  118. 

Suffrage,  restriction  of,  arguments  for, 
359,  361,  363  ;  difficulties  in  the  way 
of,  360  ;  evidence  of  the  Pennsylva- 
nia commission  respecting,  364,  365. 

Surplus  revenue,  more  dangerous  than 
deficits,  if  continuous,  80  sy. ;  can 
not  be  safely  deposited  in  banks,  83 ; 
effect  of  distribution  of,  in  1836, 
327 ;  relation  of  distribution  of,  to 


INDEX. 


407 


assumption  of  State  debts  in  1842, 
334. 
Syndicates,  emplovment  of,  for  purpose 
of  conversion,  235. 

Taxation,  public  bonds  sliould  be  ex- 
empt from,  232  ;  local  debts  limited 
by  limiting  power  of,  385,  386. 

Taxes,  harmony  of  direct,  with  popu- 
lar government,  23 ;  tardy  movement 
in,  if  newly  levied,  84 ;  increase  of 
rate  in,  does  not  always  increase 
revenue,  84,  85 ;  sudden  changes  in 
rate  of,  averted  by  loans,  97,  98 ;  if 
excessive,  followed  by  private  loans, 
98 ;  not  adequate  to  carry  through 
a  war,  106,  sq. ;  ratio  of,  to  total 
product,  for  civil  war,  109;  use  of, 
in  war-financiering,  135 ;  "  injuri- 
ous," true  conception  of,  247 ;  ten- 
dency of  rate  of,  to  rise  in  cities, 
346,  352. 

Telegraph  property,  may  be  purchased 
by  sinking-fund  appropriation,  281, 

Textile  machinery,  effect  of  introduc- 
tion of,  in  the  United  States,  376. 

Tooke,  Thomas,  quoted  on  relation  of 
money  to  prices,  190,  194. 

Tontines,  consideration  of,  173. 

Treasury-notes,  amount  of,  sold  during 
the  war  of  1812,  117;  amount  of, 
sold  during  the  war  of  1861,  185. 

Treasury  reports  of  the  United  States, 
cited  or  quoted  from,  of  1806,  176  ; 
of  1807,112;  of  1808, 113;  of  1809, 
113;  of  1813,  119;  of  1815,  126; 
of  July  4,  1861,  127 ;  of  December, 
1861,  128,  129,  170;  of  1865,  184, 
185, 194 ;  of  1866, 198  ;  of  1869,  199, 
note;  of  1872,  197. 

Tunis,  influence  of  foreign  bondholders 
in  the  government  of,  34. 

United  States,  cost  of  civil  war  in,  5 ; 
increase  in  expenditures  of,  13,  80, 


81 ;  interest  of,  in  international  bor- 
rowing, 35 ;  distribution  of  public 
debt  in,  44,  sq.;  foreign  trade  of, 
from  1861  to  1868,  60;  Leroy -Beau- 
lieu  criticises  the  policy  of  debt- 
payment  of,  242,  note;  rapidity  of 
debt-payment  in,  249,  268 ;  relation 
of  public  to  private  life  in,  371,  sq. 
United  States  Reports,  cases  cited, 
Chisholm  vs.  Georgia,  291 ;  Cohens 
vs,  Virginia,  292;  New  Hampshire 
vs.  Louisiana,  294 ;  New  York  vs. 
Louisiana,  294. 

Wages,  reduced  by  use  of  discount- 
bonds,  73. 

War,  cost  of,  between  1860  and  1870, 
5  ;  cost  of  Franco-Prussian,  54  ;  de- 
mand for  common  products  increased 
by,  69 ;  effect  of,  upon  inventions, 
70,  71 ;  Crimean,  financial  manage- 
ment of,  94 ;  true  conception  of  bur- 
den of,  107,  108;  of  1861,  taxation 
for,  109;  of  1812,  expenditures  for, 
124 ;  of  1812,  debt  created  for,  269. 

War-financiering,  policy  of,  adopted  in 
1812,  112,  sq.;  collapse  of  policy  of, 
for  war  of  1812,  121,  124;  marks 
of  a  good  policy  of,  125;  policy  of, 
adopted  in  1861,  126,89'.;  criticism 
of  policy  of,  for  civil  war,  132 ;  true 
policy  for,  134,  sq. 

War-reserves,  policy  of,  85,  sq. :  amount 
of,  among  ancient  peoples,  86 ;  op- 
posed to  constitutional  government, 
87;  relation  of,  to  industries,  87; 
composition  of,  in  Prussia,  89. 

Washington,  George,  letter  of,  concern- 
ing internal  improvements,  322. 

Wells,  David  A.,  quoted  for  rise  of 
prices  during  civil  war,  74,  note  ; 
quoted  on  diversion  of  labor  during 
civil  war,  192,  note. 

Weston,  Mr.,  quoted  on  interpretation 
of  the  sinking-fund  law,  271. 


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By  N.  Jolt,  Professor  at  the  Science  Faculty  of  Toulouse  ;  Correspondent 
of  the  Institute.     With  148  Illustrations.     l'2mo.     Cloth,  $1.75. 

"The  discussion  of  man's  origin  and  early  history,  by  Professor  De  Quatrefages,  formed  one 
of  the  most  useful  volumes  in  the  '  International  t>eientific  Series,'  and  the  same  collection 
is  now  further  enriched  by  a  popular  treatise  on  paleontology,  by  M.  N.  Joly,  Professor  in  tho 
University  of  Toulouse.  The  title  of  the  book,  '  Man  before  Metals,'  indicates  the  limitations  of 
the  writer's  theme.  His  object  is  to  bring  together  the  numerous  proofs,  collected  by  modem 
research,  of  the  great  age  of  the  human  race,  and  to  show  us  what  man  was.  in  respect  of  cus- 
toms, industries,  and  moral  or  religious  ideas,  before  the  use  of  metals  was  known  to  him." — 
New  York  Sun. 

"  An  interesting,  not  to  say  fascinating  volume." — New  York  Churchman. 

"  M.  Joly's  book  sums  up  the  discoveries  of  modern  science  bearing  on  the  primeval  history 
of  man,  on  the  antiquity  of  the  human  race,  and  on  the  circumstances  attending  its  slow  and 
partial  ascent  to  the  modern  level  of  civilization.  It  also  presents  with  brevity  but  thoroughnesB 
the  generally  accepted  theories  relating  to  the  habits  and  environment  of  primitive  man.  Itg 
usefulness  and  interest  are  much  increased  by  numerous  and  excellent  illustrations." — Ftdladel- 
phia  North  American. 

"  This  is  a  book  worth  owning." — New  York  Chridian  Advocate. 

Animal  Intelligence. 

By  Georgk  J.  Romanes,  F.  R.  S.,  Zoological  Secretary  of  the  Linnasan 
Society,  etc.     12mo.     Cloth,  $1.75. 

"  My  object  in  the  work  as  a  whole  is  twofold  :  First,  I  have  thought  it  desirable  that  there 
should  be  something  resembUng  a  text-book  of  the  facts  of  Comparative  Psychology,  to  which 
men  of  science,  and  also  metaphysicians,  may  turn  whenever  they  have  occasion  to  acquaint 
themselves  with  the  particular  level  of  intelligence  to  which  this  or  that  species  of  animal 
attains.  My  second  and  much  more  important  object  is  that  of  considering  the  facts  of  animal 
intelligence  in  their  relation  to  the  theory  of  descent." — From  the  Preface. 

"  Unless  we  are  greatly  mistaken,  Mr.  Romanes's  work  will  take  its  place  as  one  of  the  most 
attractive  volumes  of  the  '  International  Scientific  Series.'  Some  persons  may,  indeed,  be  dis- 
posed to  say  that  it  is  too  attractive,  that  it  feeds  the  popular  taste  for  the  curious  and  marvelous 
without  supplying  any  commensurate  discipline  in  exact  scientific  reflection ;  but  the  author  has, 
we  think,  fully  justified  himself  in  his  modest  preface.  The  resnlt  is  the  appearance  of  a  collec- 
tion of  facts  which  will  be  a  real  boon  to  the  student  of  Comparative  P8ycholoL''y,  for  this  is  tho 
first  attempt  to  present  systematically  well-assured  observations  on  the  mental  life  ol  animals. 
—Saturday  Beview. 

"The  author  believes  himself,  not  without  ample  cause,  to  have  completely  bridged  the  sup- 
posed gap  between  instinct  and  reason  by  the  authentic  proofs  here  marshaled  of  remarkable 
intelligence  in  some  of  the  higher  animals.  It  is  the  seemingly  conclusive  evidence  of  reasoning 
powers  furnished  by  the  adaptation  of  means  to  ends  in  cases  which  can  not  be  explained  on  tha 
theory  of  inherited  aptitude  or  habit."— iV«w  York  Sun. 

The  Science  of  Politics. 

By  Sheldon  Amos,  M.  A.,  author  of  "The  Science  of  Law,"  etc.     12mo. 
Cloth,  $1.75. 

"  It  is  an  able  and  exhaustive  treatise,  vrithin  a  reasonable  compass.  Some  of  its  conclusions 
will  be  disputed,  although  sterling  common  sense  is  a  characteristic  of  the  book.  To  the 
political  student  and  the  practical  statesman  it  ought  to  be  of  great  value." — New  York  Herald. 

"  The  author  traces  the  subject  from  Plato  and  Aristotle  in  Greece,  and  Cicero  m  Kome.  to 
the  modern  schools  in  the  Enslish  field,  not  slighting  the  teachings  of  the  American  Revolution 
or  the  lessons  of  the  French  Revolution  of  1793.  Forms  of  government,  poUtical  terms,  the 
relation  of  law,  written  and  unwritten,  to  the  subject,  a  codification  from  Justinian  to  Napoleon 
in  France  and  Field  in  America,  are  treated  as  parts  of  the  subject  In  hand.  Necessarily  the 
subjects  of  executive  and  legislative  authority,  police,  liquor,  and  land  laws  are  considered,  and 
the  question  ever  growing  in  importance  in  all  countries,  the  relations  of  corporations  to  the 
eM»y—New  York  observer. 


New  York :  D.  APPLETON  &  CO.,  1,  3,  &  5  Bond  Street. 


WORKS  ON  POLITICAL  ECONOMY, 


Mill's  Principles  of  Political  Economy :  Abridged,  with  Critical,  Biblio- 
graphical, and  Explanatory  Notes,  and  a  Sketch  of  the  History  of  Political 
Economy.  By  J.  Laurence  Laughlin,  Ph.  D.,  Assistant  Professor  of 
Political  Economy  in  Harvard  University.  With  Twenty-four  Maps  and 
Charts.     A  Text-Book  for  Colleges.     8vo.     658  pages.     Cloth,  $3.50. 

"  An  experience  of  five  years  with  Mr.  Mill's  treatise  in  the  class-room  con\Tnced 
me,  not  only  of  the  great  usefulness  of  what  still  remains  one  of  the  most  lucid  and 
systematic  books  yet  published  which  cover  the  whole  range  of  the  study,  but  I 
have  also  been  convinced  of  the  need  of  such  additions  as  should  give  the  results 
of  later  thinking,  without  militating  against  the  general  tenor  of  Mr.  Mill's  system ; 
of  such  illustrations  as  should  lit  it  better  for  American  students,  by  turning  their 
attention  to  the  application  of  principles  in  the  facts  around  us ;  of  a  bibliography 
which  should  make  it  easier  to  get  at  the  writers  of  other  schools  who  offer  opposing 
views  on  controverted  questions ;  and  of  some  attempts  to  lighten  those  parts  of  his 
work  in  which  Mr.  Mill  frightened  away  the  reader  by  an  appearance  of  too  great 
abstractness,  and  to  render  them,  if  possible,  more  easy  of  comprehension  to  the 
student  who  first  approaches  Political  Economy  through  this  author." — From 
Preface. 

Principles  of  Political  Economy,  with  some  of  their  Applications  to 
Social  Philosophy.  By  John  Stuart  Mill.  2  vols.  Svo,  Cloth,  $4.00; 
half  calf,  extra,  $8.00. 

"  Unquestionably  the  best  living  writer  on  political  economy." — Professor  Bowen. 

"  In  extent  of  information,  breadth  of  treatment,  pertinence  of  fresh  illustration, 
and  accommodation  to  the  present  wants  of  the  statesman,  the  merchant,  and  the 
social  philosopher,  this  work  is  unrivaled.  It  is  written  in  a  luminous  and  smooth 
yet  clear-cut  style ;  and  there  is  diffused  over  it  a  sott;  atmosphere  of  feeling,  derived 
from  the  author's  unaffected  humanity  and  enlightened  interest  in  the  welfare  of  the 
masses." 

The  Study  of  Political  Economy,  HINTS  TO  STUDENTS  AND  TEACH- 
ERS.  By  J.  Laurence  Laughlin,  Ph.  D.,  Assistant  Professor  of  Political 
Economy  in  Harvard  University.     16mo.     Cloth,  $1.00. 

"  The  existence  of  this  little  book  is  due  to  an  attempt  to  convey,  by  lectures  to 
students,  an  understanding  of  the  position  which  political  economy  holds  in  regard, 
not  merely  to  its  actual  usefulness  for  every  citizen,  but  to  its  disciplinary  power. 
.  .  .  The  interest  which  the  public  now  manifests  in  economic  studies  led  me  to 
put  the  material  of  my  lectures  into  a  general  form,  in  order  that  they  might  assist 
inquirers  in  any  part  of  the  country." — From  Preface. 

Chapters  in  Political  Economy.  By  Albert  S.  Bolles.  12ino,  cloth, 
$1.50. 

Political  Economy.  By  W.  S.  Jevons,  author  of  "  Money  and  the  Mechanism 
of  Exchange."     (Science  Primer  Series.)     18mo.     Flexible  cloth,  45  cents. 

Progress  and  Poverty.  An  Inquiry  into  the  Cause  of  Industrial  Depressions, 
and  of  Increase  of  Want  with  Increase  of  Wealth  ;  the  Remedy.  By  Henry 
George.     Cheap  edition.     12mo.     Paper,  75  cents ;  cloth,  $1.00. 

_"  The  received  principles  of  political  economy  are  here  submitted  to  a  fresh  ex- 
amination by  a  courageous  thinkerj  who,  though  familiar  with  the  learning  of  the 
books,  follows  the  conclusions  of  his  own  reasoning  rather  than  the  instructions  of 
eminent  teachers." — j!few  York  Tribune. 


Now  York :   D.  APPLETON  &  CO.,  Publishers,  1,  3,  &  5  Bond  Street. 

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